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    Accounting 108

    Uploaded by

    Ghie Rodriguez
    The document provides 3 problems related to accounting for contingent liabilities and provisions. The first problem asks the reader to calculate the expected warranty provision for a car dealership based on the number of cars sold and expected defect rates. The expected warranty provision is 3,500,000. The second problem asks the reader to calculate the warranty provision that should be recognized for electrical goods based on expected defect rates and costs of repairs. The amount to recognize is 300,000. The third problem asks the reader to determine the correct amount that should have been accrued as a provision by December 31, 2020 for a legal dispute, given information about the court's ruling after the financial statements were finalized. The correct amount

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    Accounting 108

    Uploaded by

    Ghie Rodriguez
    360 views2 pages
    The document provides 3 problems related to accounting for contingent liabilities and provisions. The first problem asks the reader to calculate the expected warranty provision for a car dealership based on the number of cars sold and expected defect rates. The expected warranty provision is 3,500,000. The second problem asks the reader to calculate the warranty provision that should be recognized for electrical goods based on expected defect rates and costs of repairs. The amount to recognize is 300,000. The third problem asks the reader to determine the correct amount that should have been accrued as a provision by December 31, 2020 for a legal dispute, given information about the court's ruling after the financial statements were finalized. The correct amount

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    The document provides 3 problems related to accounting for contingent liabilities and provisions. The first problem asks the reader to calculate the expected warranty provision for a car dealership based on the number of cars sold and expected defect rates. The expected warranty provision is 3,500,000. The second problem asks the reader to calculate the warranty provision that should be recognized for electrical goods based on expected defect rates and costs of repairs. The amount to recognize is 300,000. The third problem asks the reader to determine the correct amount that should have been accrued as a provision by December 31, 2020 for a legal dispute, given information about the court's ruling after the financial statements were finalized. The correct amount

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    360 views2 pages

    Accounting 108

    Uploaded by

    Ghie Rodriguez
    The document provides 3 problems related to accounting for contingent liabilities and provisions. The first problem asks the reader to calculate the expected warranty provision for a car dealership based on the number of cars sold and expected defect rates. The expected warranty provision is 3,500,000. The second problem asks the reader to calculate the warranty provision that should be recognized for electrical goods based on expected defect rates and costs of repairs. The amount to recognize is 300,000. The third problem asks the reader to determine the correct amount that should have been accrued as a provision by December 31, 2020 for a legal dispute, given information about the court's ruling after the financial statements were finalized. The correct amount

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 2

    Accounting 108

    MIDTERM (Problem)

    PROVISION
    Contingent Liability
    1. Toyo company owns a car dealership that it 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’s 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 a
    significant defect in a car is P30,000.

    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. 1,000,000
    d. 4,000,000

    Normal defect (500 x 25% x 10,000) 1,250,000


    Significant defect (500 x 15% x 30,000) 2,250,000
    3,500,000

    2. Chato Company sells electrical goods covered by a 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

    (5,000,000 x 3%) 150,000


    (3,000,000 x 5%) 150,000
    300,000

    3. 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 statement for the year ended December 31,
    2020.

    Subsequent to the end of the reporting period, on Febuary 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 P3,500,000.

    The financial statements were prepared by the entity’s management on January 31, 2021,
    and approved by the board of directors on Febuary 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

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