PROBLEMS Problem 9-1 Multiple choice (PAS 37) 1. Which of the following is the correct definition of a provision? 4. A possible obligation arising from past eventa BA hbility ef uncertain timing or amo & liability which cannot be eslly mecaured 4. An obligation to tranefer funds t an eng AA provision shall be recognized when 1. Anentity event IL Itis probable that. ‘economic benefit obligation, present obligation as a result of past ‘cutflow of resources embodying ‘ill be required to settle the IML-The amount ofthe obligation can be measured reliably a Land IT only B snd Ienly © Mand It only @ 1 Wand i ‘A constructive obligation is an obligation 1 ction thatthe entity in responsibilities because of past Dractice, published policy or current statement 0. tity has created a valid expectation in other partice that it wll discharge those responsibilities, &. Tonly & Tenly © Both and mt 4 Neither I nor It A.1t is an event that creat cbligation because the Sernative but to settle the obligation. a Obligeting event b. Pastevent €. Subsequent event 4. Current event 5. An outflow of resourens embodying economie benefit is regarded ae "probable" when 1. The probability that the event will occur is greater than the probability thatthe event will nt oscur. 'b. Tae probability thatthe event will not occur in greater than the probability that the event will osu, ¢ The probability that the event will cur is the eame as the probability that the event will not accu 4. The probability that the event will ecu ia 90% likely. 6. What amount is ecogniaod a provision? Boat estimate of the expenditure Minimum of the Maximum of the range Midpain of the range b 4 1. Where thore is a continuous range of posible outcomes, and each point in that range is as Mkely ax any other, the ange to be used in the Minimo b Maximum Midpoint 4 Summation ofthe minimum and maximum{8 When the provision involves a lange popul the estimate of the amount of tema, 1 Reflects the woighting ofall possible outcomes by their associated probabilities. In determined as the individual most likely outcome ‘© May be th individual most likely outcome adjusted for the effoctof other possible outcomes. 4. Midpoint of the possible outcomes, 8. When the provision aris estimate of the amount from a single obligation, the 1 Reflects the weighting of all possible outcomes by their associated probebilites. determined as the individcal most likely outcome. Inthe individual moat likely outcome adjusted for the fect of other possible outcomes, 4. Midpoint of the poesible outcomes. 10. Which statement is incorrect where some or all of the ‘expenditure required to settle « provision is expected t0 be reimbursed by another party? ‘The reimbursement shall be recognized only when it fertain that the reimbursement will be received if the entity settles the obligation », The amount of the reimbursement shall not exceed the amount of the provision ¢. The reimbursement shall be “netted” against the estimated linblty for the provision, 4 In the income statement, the expense relating to the provision may be presented not of tho reimbursement. Problem 3-2 Multiple choice (PAS 37) 1 Which of the lowing statement is rue i lation to 1. No provision is recognized for cost that need to be Incurred to operate in the fucur, 1A provision for the decommissioning of an oil {.Ralletion or a nuclear plant station ahall be FReoqlaed to the extent that an entity is obliged to ety damage already caused. a. only & Menly © Both and It Neither T nor TL Provisions shall be diseounted if the effect is material ‘The discount rate should (choose the incorrect one) Reflect current market assessment of the time valve of money. >, Reflect rake specific to the lability. Not reflect aka for which future cash flow estimates Ihave been adjusted 4, Be posttax discount xato 3. For an event to be an cbligating event, it js necessary that the entity hae no reali alternative but to settle the obligation created by the event and this isthe ease only 1. Where th settlement ofthe obligation can be enforced bylaw. II. Where the event ereates valid expectation in other partice that the entity will discharge the obligation le in the caso ofa constructive obligation Neither T nor 1 1‘4. Which of the following statements is true concerning the measurement of provision? 1. Phe amount recgnized as a provision should be tho best estimate of the expenditure required to sete the present obligation atthe end of raporting peskea H. The best estimate ofthe expenditure required to settle the prosent obligation is the amouns that an culty would rationally pay to settle the obligation ct tke, ‘end of reporting period or to transfor it to's thind party at that time. &. Lonly & Mealy © Both Tsnd 11 Neither I noe 11 5, Which of the following terms is sociated with a. Possible 3 Likely € Remote 4 Probable Problem 3-3 Multiple choice (PAS 37) 4 Which of the following statements is true in relation to the measurement of @ provision? 1. The risks and uncertainties that inevitably surround zany events and circumstances shell be taken inte ‘ocount in reaching the best estimate of a provesen U, Where the effect of the time value of money is ‘material, the amount of a provision shall be the Present value of the expenditure expected to settle the obligation, only Wonly Both F and it Neither I nce 11 sments is true in relation to 2. Which of the following a measurement of a provision ture evens Ghat may afl the amount regi . to settle the obligation shall be reflected in the amount {rth provision where tern eaicet secs Shien atte fare vente il ecu I. Gain rm exces onl fasts ball be taken Steam inneutnes pone 2. only b Wenly © Both I and I &. Neither I noe It 3. Which of the following statements is incorrect concerning recognition of a provision? 4. Provision shall be reviewed at thé end of each fort ero und aut to rele the cent (rade Krovi Sal be usd oly or exgenditrs for Sih the pevson wes eogialy ented. e. Frovoos tall be sensed To baste oeretng wee ‘ obligation under the contract shall be recognized and ‘Denued see poviaon 4. It is a contract in which the unavoidable costa of meeting the obligation under the contract exceed the eoonomie benefits to be recived under the contract ‘8, Onerous contract D\ Bxecutory contract , Wxecuted contract 1 Sale contract ae5. The unavoidable costs under an onerous contract represent the "least net cot of exiting from the conte which is equal to Cost of fuliling the contract 1 Penalty arising from failure to fulfil the contract © Lower of the cost of fulfilling the contract or the penalty arising from failure to fulfil the contract 4. Higher of tho cost of fulfilling the contract or the penalty arising from failure to ffl the contract Problem 3-4 Multiple choice (PAS 87) 1. This is defined as “a structured program that is planned and controlied by the management that materially ‘changes either the scope of business ofan entity or the ‘manner in which that businesa is conducted” a Restructuring B Liquidation © Rcapitalization 4. Corporate revamp 2. Bamples of events that qualify as restructuring include all of the following, except ‘Salo or termination of business 1b Closure of business location in region or relocation ‘of business from one location to another © Change in management structure suchas elimination ofa layer of management 4. Fundamental reorganization ofan entity that has an immaterial and insignificant impact on its operations. ‘3. Which ie cost of restructuring? 4. Cost of retraining oF relocating continuing staff 1. Marketing or advertising cost ©. Investment in nev system and distribution network 4. Cost of relocating busines activities from one lation tw another 130 cexeativa 18 i the abusive practice of manipulation and a accounting by dumping all kinds of provisions under the ina of proviso fr rentraseurine Big bath provision 1. Creative accounting Cookie jar 4. General reserve 5. A provision for restructuring is required when 1. The entity has a detailed plan for the restructuring. oe eckee ae sffcted by it Lonly MWonly Both T and tt 44. Neither T nor I Problem 3-5 Multiple choice (IFRS) 1A logal obligation is an obligation that is derived from al of the following, except a. Legislation 1B. A contract Other operation of law 4. An established pattern of past practice 2.For which of the following should a provision be recognized? ature operating losses Oblgstions under insurance contracts Reductions in fair value of financial instruments Obligations for plant decommissioning costs pore8. Provisions shall be recognized for all of the following, except, 4 Cleaning-up costs of contaminated land when an oil ‘entity has a published policy tha twill undertake 19 lean up all entamnination that use, Restructuring eoote after binding sale agreement hhas been signed. ©. Rectification costs relating to defective products already sold 7 4, Futuro refurbishment costa du to introduction of @ new computer system, 4. An entity is closing one of its operating divisions, and the conditions for making restructuring provision have boen mot, The closure will happen in the frst quarter of the next financial ear. At the current year-end, the eatity thas announced the formal plan publiiy and ie calculating the restructuring provision. Which of the following costs should be included im the restructuring provision? ‘a Retraining staff continuing to be employed 1h Relocation costs relating to staff moving to other ‘divisions © Contractually required costa of retraining ataff being ‘made redundant from the division being closed 4. Puture operating oases of the division being closed. ‘up to the date of closure An entity operates chemical plants, Its published polices include a commitment to making ood any damage cused fo the environment by ita operations, It has always honored this commitment, ‘Which of the following scenarios relating to the entity would give riee to a 4 On past experience it is ikely tht a chemical spilt hich would result ia having topay fines and penaes Will crur inthe noxt year, Reon enchants rina pvsitytat entity’ actions may damage surrounding wilde, The government han outlined plane for new law roquiring all environmental damage tobe rosated 4. A'Ghemealepill fom one ofthe exis plants haa Caused harm tothe eurrounding area and wildlife ane Problem 3-6 Multiple choice (IFRS) AA ‘provision” shall be rosognized srhen a. There is @ legal obligation arising from « past obligating event, the probability of the outfiow of ‘esotron in more than remote but lesa than probable, fd a reliable estimate oan be made ofthe amount of the obligation b. Thee ina constructive obligation as a result of a past cobligating event, the ovtSow of resource ix probable, finda reliable astmate oan he made ofthe amount of the obligation €, Thereisa possibl obligation arising from a past event, the outflow of resources is probable, end an approximate amount can be set aside toward the obligation 4. Management decides that it is ersential that « provision be made for unforeseen circumstances and keeping in mind this Year the profite were enough but next year there may be Toss. ‘A competitor has sued an entity for unauthorized ute of itpatentd techolgy.Tw emoutt hate wnt may be required to pay tothe competitor i the competitor coda in the laweuit is determinable with reliability, fd scoring tote logalcounel it lea han probable int more than remote that an outflow ef the resourone ‘would be needed to most the obligation. The entity that tras ouedehall at yearend ‘4. Recognize a provision for this potsble obligation 1b. Make a disclosure of the porsible obligation in footoote to the fnaacial statements ‘Make no provision or disclosure and wait until the uit ie finally decided and then expense the stsount paid on setdement, if any 4. Set nie, as an appropriation, «contingency reserve, fan amouat based onthe best cetimate of the posible liability. 1385.A factory owned by an entity was destroyed by fie, The entity lodged an insurance claim for the value of the factory building and plant. and an amount equal to one year’ net profit, During the year, there were a number of meetings with the representatives of the insurance fompany. Finally, bofore year-end, t was decided that the entity would receive compensation for 80% ofits claim. The entity received a loter that the settlement Thad been mailed but it was not received before year-end. How thould the entity treat this in is Ginancial statements? ‘Disclose the contingent asset in the footntes. 'b. Wait until next year when the setlement check is setually received and not recognize this receivable st all sino at yearend itis a contingent asset ¢. Record 90% of the claim au a receivable as itis virtually cortain that the contingent seset will received 4. Record 100% of the claim as a receivable at year-end as itis virtually cetain that the contingent avcet will, to received, and adjust the 10% next year when the slement check is actally received An entity has been servod a legal notice at year-end by the Department of Environment and Natural Resources fo ft smoke detectors in its factory on or before middle of the next year. The cost of fitting emake detector can be measured reliably. How should the entity treet this in ite financial statements t year-end? 1 Recognize a provision for the current year equal to the estimated amount 1b, Recognize a provision for the current year equal to ‘one-half only of tho estimated amount. ¢. No provision is recognized at yearend because there Js no present obligation for the future expenditure sce the entity can avoid the future expenditure by ‘hanging tho method of operations, but disckwure is required 4. Ignore the-ovent 5.The board of drestrs of an enti doce sn the ltr fperations in the Far East ‘The decision wae based os a detailed formal plan of Festructuring as roqured by PAS 5. This decision wat “Convayed to all workers and management personnel at {he bendquarters in Europe, The eost ofthis restructuring plan can be measured relisbly. How should the entity Treat thie restructuring i ite Bancial statements for the furront year-end? fs Because the entity has not announced the eottucturing to those aficted by the decision and Shs i ot Fised am expectation thatthe exit wil schualip"cncry out the sestractariog and ae ne SShsrutvesllgtion han arom, only daclos the Sestraturing deseion and the cont of restructuring 1s Recognize «provision for restructuring since the Imard of irecors has approved st and it has been nounced in the headquarter of the entity in Europe, Mention the dosision to restructure and the eott Ieclwed inthe chagman'e statement in the annual ‘Rport sine i isa decom ofthe boned of directors 4, Because the restructuring hes aot commenced before crend, based on prudonen, wait unt nex year and So nating in thie Jear's nancial statement.Problem 3-7 Multiple choice (PAS 37) L.Which of the following statements is incorrect concerning a contingent lability? 4 Acontingent lity is either probable or measurable ‘but not both. ies 1 An entity all not recognize a contingent laity in the financial statements oe aes, A contingentlabity te disclosed only. 4. Tee comungent hobly ie remot, ielowure is also Kaeont oy nk 7 A contingent Viability is 1. Possible obligation that arises from past event and whose existence will be confirmed only by the socurrence or nonoccurrence of one ot more future Uncertain events not wholly within the contel of the entity. 1, Present obligation that arse fom past event and it isnt probable that an outhow of resources embodying Scgnotie Bncfte wil be reacted to sete the Shligation OW the amount of the obligation sannot ‘measured reliably. * i only nly Both I and It Neither Tnor IL Which of the following statements in relation to @ contingent libilty is true? 1. An obligation ana rel of ho entity creating xpectation that fe will discharge ite reponsibtes is cmtingen nb. 1 A preset obligation that artes from past event but annot bo rliably monrard ea contingent hab. Lonly wenly Both I and It Neither Tnor 11 4. tis a possible asset that srises from past event and hou este wl be cosemed nt by the eure ‘ot wholly within the conteel ofthe entity . Contingent asset Contingent gin onsite asset Asset in sorpemso Borel 5.Which of the following statements is incorrect ‘concerning & contingent asset? 4. Anentity shall not recognae a sontingent actin its financial statmnonte tb, hon the realization of income is virtually certain the related wet na longer a contingent asset end ce. Acontingent aswel fe dsclosed whore an inflow of cononiebenedita i probable 4. Reontingent ascot in dieclosed Where an inflow of Sconomc benefits i remote Problem 3-8 Multiple choice (AICPA Adapted) 1.The likelihood thatthe future event wil oF will not occur can be expreseed by a range of outcome. Which range ‘means that the future event occurring ie very alight? a Probable 1 Reasonably possible ©. Certain a. Remote ‘An entity did not record an accrual for a present Shligation but disclose the nature of the obligation and the range ofthe Tou. How kay is the loss? Remote Reasonably possible Probable Certain, melee 1st3.4 present obligation that is probable and for which the famount can be reliably estimated shall ‘4. Not be accruod but shall be disclosed in the notes to the Snancial statements », Be accrued by debiting an appropriated retained rings aeotint and cred bility account ‘accrued by debiting an expense account and crediting an appropriated retained earnings account 4. Be accrued by debiting an expense account and crediting lability aesount. An item that is not a contingent liability ie ‘4 Promium offer to customers for labels or box tops B. Accommodation endorsement on cutomer not ©. Additional compensation that may be payable on a dispute now being. arbitrated 4 Pending laweuit Finsuranee plan. Rach yea, the enti ined earnings for contingencies ina ‘mount equal to insurance premiums saved Fecognized lowes from lawauite and other cain Fosult ofan ecident inthe current year, the enti io a defendant in lawsuit in which it will probably have to bay meesurable amount of damages” What are the elle of this lawsuit’s probable outcome on the eatity {Enancial statements for the current year? " 100 in expenses and no effect on liabilities 20 in both expenses and liabilities ©. No effect on expensos and an increase in labiliti 4. No effect on either expenses or labiliticn Contingent assets are usually recognized when 8. Realized Occurrence is reasonably possible andthe amount can be reasonably estimated ©. Occurrence is probable and the amount can be reasonably estimated 44. The amount can be reasonably estimated 18 1.Which of the following is the proper accounting treatment of contingent auset? fn scerued aocount © Detorsed earning Am account recelvable with an additional disclosure explaining the native ofthe transaction 4. A Waclosure only 8 When the occurrence of a contingent asset is probable nd the amount can be reasonably estimated, the ‘ontingent aseet shoul be Recognized in the statement of financial position and disclosed bb. Classified as an appropriation of retained earnings. Disclosed but not recognized in tho statement of financial position 4, Neither revogaized in the statement of financial position nor disclosed 4. An emtty operates a plant in a foreign county. It is Bro that the plat wl be eprptaiad Hower {he foreign government has indicated that tho entity wi ‘ete actinic amount of ampeonation fr th lat ‘The tmount uf compensation i lees thon tho fae value tut cacoel the cnvrying amount of the plant. The Contingont asset should be reported ‘a As a valuation allowance ax part of shareholders! equity », Ava fied aast valuation allowance account In the notes to the Gnancial statements 4. In the statement of Bnancial position x [Ac yearend, an entity was suing a sompettr for patent {logement The evard from the probable favorable fulcome could be reasonably estimated. The entity's {fanonlsntements should report the expect award se a. Receivable and revenuo B Receivable and reduction of patent 4 Receivable and deferred revenue Disclosure only 139Problem 3-9 Multiple choice (AA) 1 Contingent liabilities will or will not become actual liabilities depending on Whether they are probable and estimable. ‘The degree of uncereainty. The present condition suggesting a Liability The Outcome of future event. = contingent liability shall be recognized when Any lawouit is actually led against an entity Tis certain that funds are available topay the amount of the claim . Its probable that a lability has been incurred even. though te amount of he lee cance reasonably 4. The amount of the loss can be reasonably estimated and itis probable prior to issuance of financial Statements that a lability has been incurred ve > acer 8. How should a contingent lability be reported in the financial statoments when itis reasonably posible that the entity will have to pay tho Liability atm future date? ‘Aa a deferred linbility ‘As an accrued Kability ‘As a diseloaure only ‘As an account payable with an additional disclosure ‘explaining the nature ofthe transaction 4 Disclosure uaually is not required for & Contingent gains that are probable and can be reasonably estimated, 1b Contingent losses thet are reasonably possible and cannot be reasonably estimated ©. Contingent losses that are probable and cannot be reasonably estimated. 4. Contingent losses that are remote and can be reawonably estimated. 40 5, Provisions are contingent libiities which are accrued bocaues the ikelihoed of an wnfavorable outcome ie ‘a. Virtually contain . Greater than 50% ©. Atleast 75% @. Possible 6. Reporting inthe body of finencil statomonts is required for 1. Lose contingencies that are probable and can be reliably measured. . Gain contingencies that are probable and can be robably measured, Lose contingencies that are possible and can be reliably measured 4. All loss contingencies Pending litigation would gonerally be considered & Nonmonetary lability Contingent ability timated lability 4. Carrent liability '5 Gain contingencies that are remote and can be reliably measured a. Must be disclosed in @ note to thé financial statements 1b. May be disclosed ina note tothe financial statements ©. Must be reported in the body of the financial 4. Should not be roported or disclosed 1419.4 contingent liability 4. Dotnet cits a itty buts amount ane eeenie iaae ee ea cemonay etna © Ie ie ool alas tontngenge coe eee vxament 10. Which of the following should be disclosed in the financial statements as a contingent lability? 1 The entity has accepted lisbility price to the year gud fruntir iomiealof emplsee ands to py b. The entity hes received a letter from a supplier complaining about an old unpaid invoice, . The-entty tn involved in a logal case which it m pocaibly love although this is hot prebables = 4. The entity has not yet paid certain Claims under sales Problem 3-10 (AA) Primo Company provided the following information for the * Prime Company has long owned a manufacturing site that thas now been discovered to be contaminated with toxic waste. The entity has acknowledged ita responsiblity for fhe contamination. An initial clean up feasitlty study thas shown that it will coat at least PS00,000 to clean up the taxie waste Prime Company has been quod for patent infringement and lost the case. A preliminary judgment of PO0,000 was issued and is under appeal. The entity's attorneys agree that itis probable that the entity will lose this Required: Prepare journal entries to recognize any provision at the ‘ud of eutrent year a Problem 3-11 (AICPA Adapted) Sunrise Company has several contingont liabilities on December 81, 2013, A brief deeeription ofeach liebilty is a follows + A personal injury liability euit for P500,000 was broweht fusinse Sunrise Company in March 2018. The imanagement end legal counsel of Sunrise Company Concllfed thats ia not prebablo that Sunrise Compan sll be esponsible for damages end that P150,000 isthe Dest estimate ofthe damages. + In daly 2013, Sunrise Company becamo involved in a tax Aispute with the BIR pertaining to 2012 income tax. In Dovomber 2013, a judgment for P400,000 was assessed fageinet Sunrise Company by the tax court, Sunrise Company is appealing the amount of the judgment, The tax advisor and legal counsel of Sunrise Company believed i a probable thatthe assessment can, bbe reduced on appeal by 50% ‘+ Sunrise Company signed es guarantor for P200,000 toon, by PNB to Sunset Company, a principal supplier of Sunrise By reason of financial difficulties, itis probable that Sunrise Company shall pay the P200,000 loan with only 12 60% recovery anticipated from Sunset Company Required: Prepare journal entries to recognize any provision on December 81, 2013, uaProblem 3-12 (AICPA Adapted) sur 6 Star Company, a publish, is preparing ite December 2013 nunca statment Sad Imut determine te Poses accounting treatment for each of the following stuatiane: ‘Star Company sls scion to several magazines for a onesyeat, two-year, or three-year periods Cock eceipts from subscribers are credited to subscription revenue eon seearned ‘The unearned subscription rovenue account af F5,000.000 on December 31 2013, Outstanding syubscriptions on December 31, 2013 expire as follower © During 2014 Daring 2015, 190% Daring 2016, 200,000 An author filed» suit for breach of contract damages of 2,000,000 aginst Star Company on July 2019, The entity's legal counsel believes that an ‘afavorable outcome ie probable. ‘The best oatimate of the court's award tot 1,500,000. rd to the plaintiff is During December 2013, a competitor fled titor Giled suit aginst Star Company for industrial espionage, clatmin 5,000,000 damages : ‘Management and loga counsel bel reel believe it is probable that damages-will be awarded to the plaintiff and the bost estimate Gf the damages is P2,000,000, Required: Prepare journal entrios to record the transactions and vents. Ifyou believe that no entry is required, explain your Problem 3-13 (IAA) astern Company hat several contingent lisbilitioe on. Bascatbes 31 2019, The auditor obtanea the following brief feasription of each ibility + In May 2013, Eastern Company became involved in Hugation, In Decoraber 2013, the court assessed & Jidgment fr P1,600,000 against Bascern Company. The iiciey is appealing the amouat of the judgment. ‘The cry eye bekeved tis probable that the assessment ean ‘be soluced on appeal by 50%. The appeal is expected to ike atleast Yeas + In duly 2013, Pasig City brought action against Eastern Coannday for pollting the Pasig iuiver with ite waste products, Iti probable that Pasig City wil be succesful Bar the amount of damages che entity might have fo pay should not exosed P1,500,000, Eastern Company has signed as guarantor for a 1.000.000 lonn by Fist Bank to Northern Company, & Drinipal pupplier to Eastern Company. At this ime, there TeESGaly «remote Ukeiheod that Bastern Company will Have ta make payment on behalf of Northern Company. Required: Propare journal entries to recognize any provision on December 81, 2013, Problem 3-14 (IFRS) Iriga Company issued its 2013 financial statements on March 1'So1s, The following dats aro provided by the entity for the year ended December 31, 2013: “Amount oving to anather entity for wervioe rendered hunny December 2018, son.o00| meted ng service env owing toemplayees in eopectof ae scricet 1,200,000 atinated coke locating an employee from head ‘es toe brane in anor ety employee wil 100,000 lyst releste January 2010) sinc ost of verhasng machine every 8 years ‘TanmackineweSyearscldon Decewbsr 31,2019) 190000 145Requifed: 1. Determine the amount of provision to be recogni December 3, 2013, ait amihad 2 Esplin the treatment of Esplin te treatment of he other tems not inleued in Problem 3-15 (IFRS) A Singapore-based shipping entity loa ago valoda P5,000,000 on a voyage to Asati he ‘however covered by an insurance policy. —e Acorn th pet ofthe rena ‘collectible, subject to the deductible clause in policy, “ We amount i ‘the ineurance Refers yearend the shipping entity reciod a letter tom {he ntarance entity thats cock was inthe mail fr 0h of ‘The intemational fight forwarding enti the shipping entity with the dcivery ofthe cage ons led ew fr 5000000 caning th vo the argo that was lost on high sea, snd alco conscque Shag of 72000000 reeling ou hc dla According to the legal counsel for the shipping entity, it probable chat the shipping entity would have to pay the 5.000000, but is a remote bei that twos have {epay the adiinal 2,00 000 claimed bythe intonation] ight forwarding entity, ince thin lo wae opel ‘icluded in the freight forwarding contract ™_ Required: Determine the amount of provision at Determine t of provision at year-end, Explain fully 6 Problem 3-16 (IFRS) ‘Teoy Company's directors decided on November 1, 2018 to ‘estrocture the entity's operations as follows: + Mindanao Branch would be closed down to concentrate ‘on Marila operations + 200 employees working in Mindanao Branch would be retrenched on November 30, 2015, and would bo paid Their accumulated entitlements plus three month! + The remaining 50 employees working in Mindanao Branch would be transferred to Manila, which would continue operating + Five executives would be retrenched on December $1, 2013, and would be paid their accumulated entitlements plus these months’ wages On December $1, 2019, the following transactions and events bad oosurved: + Mindanao Branch was abut down on November 20, 2018. + The 200 retrenched employees have loft and their ‘Rumulated entitlements have been paid, However, aa Stmount of P1500,000, representing a portion of the three ‘months! wages for the Fetrenched employees, has stil ‘ot been pal + Conte of P400,000 were expected to be incurred in traneforring the 50 employees to their new work if Manila, The transfer is planned for January 18, 2014 + Tour of the five executives who have been retrenched have had their accumulated entitlements paid, including {ihe three monthe’ wages, However, one remains in ord to complete administrative take relating to the closure ‘of Mindanao Branch and the transfer of staf to Manula, ‘Ths executive is expected to stay until January 31, 2014 His salary for danuary will be P50,000 and his Tetrenchmont package willbe P200,000, al of which will. ‘erpaid om the day he lear. He estimates that he would pend 60% of his time administering the closure of Sindaoin Beanch, 3084 on administering the transfer of Maff to Manile, and the remaining 10% on general fministraion. urRequired: 1. Determine the provision for restructuring on December 31,2018, 2 Prepare journal entry to record the provision for reatracturing Problem 3-17 (AA) Anneliese Company is involved in » restructuring related tw its toy division. The controller and chict finanee officer fare considering the fllowing costs to acer ee part of the restructuring ‘The entity has a long-term lease on one of the facilities related to the division. Ie is estimated that it will have to ‘bay a penalty of P4,000,000 to break the lease. The entity festimates thatthe present value related to paymont on the Tease contract ia P6,500,000. ‘The entity's allocation of overhead costs to other divisions will by P15,000,000 due to the restructuring ofthe ‘Also, some employees wil bo shifted to other divisions within ‘the entity and cost of retraining the employees in cotimated ‘at P20,000,000. ‘The entity has hired an outplacement firm to help in dealing withthe numbor of terminations related tothe restructuring, eis estimated that the coat tothe entity will be PO, 000,000 Employee termination coste are estimated to be P30,000,000 and the entity believes that moving ssable assets from the {ay division to other division within the entity will cost 200,000, Required: Compute the total amount that should be included in restructuring provision 148 Problem 5-18 (IAA) On January 1, 2013, Petron Company purchased ono tanker Alepot ata cost of PC, 000,009, The enti expected to operate the depot for 6 yours after which itis legally required to Giomantle the depot and remove the underground storage tanks, The oll tanker depot in depreciated using straight Tine with no residual valu Ie sly etimated that the cot of dacmmianoning tha doo wu amount to P1600 000, The appropriate osama Tom The preset wave ot ae 1 fr 5 perro, Decent 31201; ar 8 yar perting te depot, api pi«domltn ent diamant the depot Space of 000 Required: 1 Prepare journal entries in 2019 in relation to the depot tnd the decomiatoning abit. 2. Prepare journal entries to record the derecognition of the depot and the settlement of the decommissioning liability on December 31, 2017 49Problem 3-19 (IAA) On January 1, 2019, Stanford Company purchased # mining ste that will have to be restored to certain epecifications When the mining production ceases. The cost of the mining sito is P8,000,000 and tho restoration cost is exposted to be 'P2,000,000. It is estimated that the mine will continve in operation for 10 years, ‘The appropriate discount rate is 8%. The present value of at 8% for 10 periods is 0.4632. On December 31, 2022, the sntity contracted with another entity forthe restoration of the mining site in accordance with specifications at a coat of 1,800,000, Required: 1. Prepare journal entries in 2018 to record the purchase of the mining site and the recognition of the ‘decommissioning Laity. 2 Propare journal entry to record the settlement of the decommissioning liability on December 31, 2022, Problem 3.20 (IAA) On January 1, 2013, Camille Company purchased a gas Astoxfication facility for P9,000,000. The east af cleaning wp the routine contamiaation caused by the inital location of tz on the property is eatimated to be P1,600,000. This cost Wall be incurred in 10 years when all of the existing stockpile if gas is detonified and the facility is decommissioned Additional contamination may oocur in succeeding years that the facity isin operation. On January 1, 2015, additional fontamiaation clean up cost is lppropriate dicount rate is 6% Tho prosent value of 1 at 630 is 068 for 8 periods and 0.56 for 10 period, On December 31, 2022, the entity paid a contractor an. amount of 2,000,000 for the decommissioning of the Aetoxifeation faciiy 150 Required: epare journal entries in 2013 in eattion to she 1 Drepars koe Tait and tho decommsionng habit sopare journal entrie in 2015 49 relation to the > BevRipation Tac end docommisstoning nay opare journal entries on December 31,2022 to record 8 Trmats Jouttln of the detontentonfelity nthe imation ofthe cecsminsning hay Problem $-21 (IFRS) ber ‘The aualt of Anne Company for the year ended Dece 51,2013 was completod on March 1, 2014, gana! statomente were signed by che managing Tesetter"tn' March 13; 2014 and approved by the Sree oe on March 3, 2014, The next cvente ave seurred + onJanuary 15, 2014, a customer owing P900,000 to Anne Comapany Bled for banruptey ‘The financial statements include an allowance for ‘Teabttal accounts pertaining to this customer only of 100,000. + Specialized equipment costing P525,000 purchased, on September 1, 2018 was destroyed by fire on December 1e.'2013. Anne Company has booked a receivable of 'P400,000 from the insurance entity [Aft the insurance entity completed its investigation Gn February 1, 2014, st vas dacovered that the Gre took hace dus Qo negligenee of the machine operator. AP 9 Fault, the insurers lability was zero on this claim, Required: Byepare adjusting entries on December 3, 2018 to recognize {hstovents afer reporting betioa 11Problem 3.22 (IFRS) ‘The following data are provided by Norway Company. The fend of the reporting period is Docomber 31, 2013 and the Tinencial statements are authorized for lazue on March 15, 2014. + OnDecember 31,2013, Norway Company had a receivable ‘of P400,000 from a customer that i due 80 days aftr the fend of reporting period On January 15, 2014, a receiver was appointed for the ‘aid customer. The recsiver informed Norway Company ‘hat the P400,000 would be paid in fll by June 90, 2014, Norway Company had reported a contingent liability on December 81, 2013 related to a court case in which Norway Company was the defendant. The case was not ‘heard until the fest weok of Febrsry 2014, (On February 11, 2014, the judge handed down a decision against Norway Company. The judge determined that Norway Company was lable to pay damages and costs totaling P3,000,000 On December 31,2013, Norway Company had a receivable from a large customer in the amount of P3500 000. On January 81, 2014, Norway Company was advised by ‘the liquidator of th said customer thatthe customer was Insolvent and would be unable to repay the full amount owed to Norway Company. ‘The liquidator advised Norway Company in writing that only 10% of the receivable will be paid on April 20, 2014 Required: Prepare adjusting entries on December 81, 2013 to record the eventa after the reporting period. 152 Problem 5-28 (IFRS) In May 2013, Cherey Company relocated an employee from ~heManile head office to a branch in Zamboanga City. A of Mee Be PS an ce 9 aS mtn rh ta ae Seer meaaettint ry ene icone aoonteeniey se Sasa erae setae sno What amount ehould be reported as provision for reeeation conts on June 90, 20139 ‘3 250,000 & 340:000 © 160,000 140.000 Problem 5-24 (IFRS) Toso Company owns a car dealership that it uses for TeRlng tate under wesranty. in preparing its financial fevomests; the entity neede to ascereun the provision for (rarranty that it would be required to provide at the end of Ue year. "The entity's experience with warranty claims is as follows Cento spring rods mae 60% ofall care sold in a year have zaro defect, 25% of ll cars Sold ina year have noruial deft, and 16% of ll care sold in year have significant defect cot of rotfying& normal defect” ima car is 710,00. ‘To cat ofeeipengaaignifcant defect in care P90 000. ‘Th ony old 800 care during te Jar ‘What is the “expected value” of the warranty provision for the current year? a. 3800,000 50,000 (0,000Problem 3-25 (IFRS) ‘Chato Company sells eloctrical goods covered by a ono-yoar ‘warranty for any defects Of the sales of P70,000,000 fo the Jour, the entity estimated that 2% will have major defect, 153 will have minor defect and 92% will have no defect. Tho oat of repaire would be P5,000,000 if all the products cold Ihnd major defect and P3,000,000 if all had minor defect. What amount should be recognized as a warranty provision? ‘8,000,000 5,600,000 300,000 190,000 Problem 8-26 (IFRS) ring 2013, Odyssey Company inthe defendant in patent infringement lawsuit. Tho entity’ lawyers boliovo there ia ‘230% chance thet the court will dismiss the ease and the tntity wil incur no outflow of econoale benefit. However, {fhe court rules in favor ofthe claimant, the lawyere below ‘that cher isa 20% chance thatthe entity willbe required to pay damages of P200,000 and an 80% chance that the entity ‘willbe required t pay damages of P100,000. Other outcomes tre unlikely, The court is expected to rule in late Decomber 2014. Thare is no indication that the claimant will settle out ‘of court, A 7% risk adjustment factor to the probability weighted expected cash flows ia considered appropriate to Telflect the uncertainties in the cash flow estimates. An lppropriate discount rate is 8% per year. The prosent value tof lat 6% for one period is 0.95. What ia the measurement of the provision for lawsuit on December 3, 20137 100,000 "84000 «89,880 a 85.386 14 Problem 3.27 (IFRS) During 2013, Libya Company ia the defondantin a broach of patent lawsuit. The lawyers bebove thero isan 80% chance ‘hat tho court wil aot dismiss the enue and the entity sil incur outllow of benesta If the couttsules in favor of the claimant, th layers believe that there iss 6% chance chat ‘the entity will be required to pay dainages of P2,000,000 and ‘840% chance that the entity willbe required to pay damages ‘of P1,000,000. Other amounts of damages aro unlikely. ‘The ‘vurt ie expected to rule within three moaths. There is no Indication that the claimant will setle out of court. An 8M Fisk adjustment factor to the cash flowe is considered, appropriate to reflect the uncertainties in the enth flow fntimates, What is the measurement of the provision on December 81, 2013? 1,280,000 1/332, 400 © 1,500,000 4. 000,000 Problem 3-28 (FRS) During 2013, Thor Company was sued by a competitor for 5,000,000 for infringement of «trademark. Based on the ‘advico of the entity's legal counee, the entity scarued the ‘sum of P3,000,000 as a provision in its financial statements for the year ended December 31, 2012, Subsequent tothe end of the reporting period, on February 1, 2014, the Supreme Court decided in favor of the party alleging infringement of the trademark and ordered the defendant topay the aggrieved party a sum of P3,500,000."The nancial statements were prepared by the entity's management on ‘anuary 31, 2014, and approved by the board of directors oa February 20, 2014: What amount of provision should have been accrued on Dacemnber $1, 2013? 2 5,000,000 3.000.000, € 3.500,000, a °Problem 3-29 (IFRS) Caress Company carried a provision of P2,000,000 in its dra financial statements on December 31, 2013 in zelation t an unresolved court case. On January $1, 2014, when the nancial statements on December 31, 2013 had ot yet been authorized for issue, the cate waa settled and the court decided the damages payable by Caress Company to be 2,800,000: What amount should be adjusted on December 31, 2013 in relation to this event? 1.” 2,800,000 6, 2.000.000 800,000 a ° Problem 3-0 (AICPA Adapted) On December 31, 2013, Mith Company was a defendant in a pending laweultIn the opinion ofthe entity's attorney itis probable that Mith Company will have to pay P500,000 and itis reasonably possible that Mith Company will have to pay P600,000 as a result of this lawruit. What should be Feported in the 2013 financial statements? {2 An accrued lability of P500,000 only 1B. An accrued Liability of P500,000 and disclosure of a ‘contingent liability af 100,000 «An aceruod liability of P600,000 only. 4. No information about this lawsuit Problem 831 (AICPA Adapted) During 2013 Beal Company'beeame involved in tax dis ‘with the BIR. On December 31,2013, the entity's tax advisor bolioved that an unfavorable outcome waa probable and the beat estimate of additional tax way P500,000, but could be as much a8 P650,000. After the 2013 financial statements were Insued, the entity received and accepted BIR setlement offer of P550,000. What amount of acerued liability should bbe reported om Decomber 81, 2013? a 680000 . §80000 500,000 acearaaalo 156 Problem 3-32 (AICPA Adapted) On November 5, 2018, a Dunn Company truck was in an * accident with an auto driven by Bell, The entity reo fotice on January 12, 2014 of lawsuit for P700,000 da for personal injuries suffered by Bell. The entity's counsel belived ss 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 fends on December 21, and the 2019 financial statements were fssued on March 2, 2014 What amount of provision should be accrued on December 31,2013? ao 1 200,000 ©. 600,000 4. 350,000 Problem 3-83 (AICPA Adapted) During 2013, Manfred Company guaranteed a supplier's 500,000 loan from a bank. On October 1, 2013, the entity was notified thatthe supplier had defaulted on the loan and filed for bankruptcy protection. Counsel balieved the entity will probably have to pay P250,000 under ita guarantes. Ax & result ofthe supplier's bankrupty, the entity entered into a fontract in December 2013 to retool ite machines 20 thet the entity could acnept part fom other suppliers, tooling costs fre eatimated to be P300,000. What amount should be reported as accrued lability on December 31, 2018? ‘250,000 450,000 ©. 550,000 4. 750,000Problem 3-34 (AICPA Adapted) (On February 5, 2014, an employee filed » P2,000,000 lawauit ageinst Steel Company for damages suffored when a plant Gf the entity exploded on Decomber 29, 2013.'The entity's Tegal counsel believed the entity will probably lose the lawault and estimated the loa to be P500,000, The employee hhas offered to settle the laweuit out of court fur POD0,000 ‘but the entity will not agrée to the setlement. In the Decomber St, 2013 statoment of financial postion, what amount should be reported as accrued lability from Tawauit? a. 2,000,000 1,000,000 ©. "900,000, 600,000, Problem 3-85 (IAA) Concord Company sells motoreycle helmets. In 2013, the entity old 4,000,000 helmets before discovering a significant defect in their construction. By December 31, 2013, two awaits had been fled against the entity. The fest laweuit, which the entity has litle chance of winning, is expected bevsttled out of court for P1,500,000 in Jantary 201, ‘The attorneys think the entity has 60-50 chance of winning the second lawsuit, which i for P1,000,000. ‘What is the accrued liability on Decomber 31,2018 as a result ofthe lawauite? a. 1,500,000 1,000,000 1. 2500,000 0 158 Problem 3-36 (IAA) ‘oe Corapany is preparing its annual financial statements + on December $1, 2013. Because of « rooontly proven health hazard in one of ta products the Philippine government has Clearly indioatd ite intention of quiring the entity to recall fall cana of this product sald in tho last three months. The ‘management of the entity estimated that this reall would coat P580,000, What acedunting recognition should be ‘accorded this situation? [No recognition [Note disclosure only Expense of 580,000 and ibility of P580,000 Expense of PS80,000 and retained earnings restriction cf P80,000 Problem 3-87 (IAA) Nia Company is involved in litigation regarding a faulty product sold in a rice year. The entity has consulted with Ite attorney and determined that itis possible thatthe entity tay lose the cate, The attorney estimated that there is a 40% chance of losing. If this is the ease, the attorney Gstimated that the amount of any payment would be 'P5,000,000. What is the required journal entry asa result of this litigation? a. Debit litigation expense for P5,000,000 and credit litigation ibility for P5,000,000. b. Novjournal entry is required ©. Debit litigation expense for P2,000,000 and credit [tigation ability for P2,000,000, 4, Debit litigation expense for P3,000,000 and credit [itgntion liability for P3,000,000. 189Problem 3-88 (IAA) Winter Company is bing ued fries caused to roti sa af enece one eas pt in Dermiting the lon! rensdenta to be enpoed to highly tne ‘hemicala fom its plant. The entity lawyer stated that i is probable thatthe entity wil lee the eit and be fond liable for a judgment costing the entity anywhere fom 7.90002 00 Homerr lawyer emma tat most probable cst P000,000, What amount shot ‘be accrued and disclosed? howl © A lose contingency of P1,200,000 and disclose an additional contngenty af up to P8000 A loss contingency of P3,600,000 and disclose an auitional contingency of up to P2400 00 ce Aiase contingency of P2;600,000 but not disclose any ‘ditional contingency. 4. No lous contingency but disclose a contingency’ P1200, 000 to Peeo0 00. eae Problem 3-39 (IAA) On danny 1, 2012 Brenda Company eda machine wi sett 26 a The sete pratt to, 00 tinted eis ase nen PSN ea ae ‘ale was 3,200,000 Ondanuary 2013, ths machane was Treprebly damense by Lanz Gompaey sates sone in Geter 2010-4 cst send Sane Ps0000 aguas Lann inner of Breads Os Deseo 1 018 the ial euzome of as cae war ing eh todos aneciaHewe pea tania etstver Leoe apeoel wath aerinetc Become 31201 ht umourt yan hold ea 320,000 260,000 © 200,000 a ° Problem 3-40 (AICPA Adapted) ‘On November 25, 2013, an explosion occurred at a Rex Company plant causing extensive property damage to area buildings. By Marsh 10, 2014, claims had been saserted against Rex Company. The management and counsel Concluded that it is probable Rex Company will be responsible for damages, and thet P3,500,000 would be & Feavonable estimate of ita liability. The entity’ P10,000,000 Comprehensive public lability policy has a P500,000 Aeduetible clause What should be reported in the December 31,2013 financial statements which were jnwued on March 25, 20147 a A footnote disclosure indicating the probable loss of 3,500,000, bb An accrued lability of P3,500,000, An acerued lability of P500,000. |. A footnote disclosure indicating the probable loss of 500,000, Problem 3-41 (AICPA Adapted) During 2018, Smith Company filed euit against West Company seeking damages for patent infringement. On December 31, 2013, the legsl counsel believed that it was probable thet Smith Company would be successful against Weat Company for an estimated amount of PI,500,000. In March 2014, Smith Company was awarded P1,000,000 and received full payment thereof In Smith Company's 2013 financial statements issued February 2014, how should this award be reported? [As a receivable and revenue of P1,000,000. ‘As a receivable and deferred revenue of P2,000,000. ‘As a disclonure of « contingent asset of P2,000,000. ‘Asa disclowure of & contingent aset of P1,500,000. 161Problem 8-42 (AICPA Adapted) During January 2019, Haze Company won a litigation award fot P1,500,000 which was tripled to P4,500,000 to include punitive damages. The defendant, who is financially stable, hhas appealed only the 3,000,000 punitive damages. ‘The entity was awarded P5,000,000 in an unrelated suit it Ged, which is being appealed by the defendant. Counsel is unable {o estimate the outcome of these appeal In the 2018 income statomont, what amount of pretax gain should be reported? ‘= 1,800,000 1. 41500,000 5,000,000 4 91500,000 Problem 8-48 (AICPA Adapted) In May 2013, Caso Company filed suit against Wayne Companys nt ‘court verdict in November 2013 awarded Caso Company P1,500,000%n damages, but Wayne Company's appeal is not expected to be decided before 2014, ‘The lgal counsel believed itis probable that Caso Company will be successful against Wayne Company for an estimated ‘amount inthe rango between PS00,000 ad PI. 100,000, with 'P1,000,000 considered the most likely amour ‘What amount should Caso Company record as income from tho laweuit for the year ended December 31, 2018? a. 1,500,000 ‘1,100,000 4 11000,000, ° ae Problem 3-44 (AICPA Adapted) "Tone Company isthe defendant in a lawsuit lad by Witt in 2012 disputing the validity of copyright held by Tone. On December 31, 2012, Tone determined that Witt would probubly be suecsosful for an estimated amount of P400,000. ‘Appropriately, a P400,000 loss wan accrued by a charge to income for the year ended December 31, 2012. (On December 21,2013, Tone and Wit agred toa settlement providing fr ash payment of P250,000 by Tone to Wit, and ‘transfor of Tones copyright to Witt. The carrying amount of ‘the copyright on Tone’ accounting records was PO0,000 on. December $1, 2013, What would be the effect of the settlement on Tone's income before tax in 2013? ‘2 150,000 increase b. 60,000 decrease © 90,000 increase 90,000 decrease Problem 3-45 (FRS) Elysee Company's draft financial statements showed the profit before tax for the yoar ended Docomber 31, 2013 at 'P9,000,000. The board of directors authorized the financial statements for sue on March 20, 2014, A fire occurred at ono of Elyse’ stas on January 15, 2014 ‘with resulting damage costing P7,000,000, only P4,000,000 (of which is covered by ineurance. The repairs wil take place ‘and be paid for in April 2014. Tho P4,000,000 claim from the insurance entity will however be reovived on Febraaey 14, 2014. What amount should he reported as profit before tax for 20137 . 13,000,000 9.000000 © 2.000:000 4. 6.000.000 168Problem 3-46 (IFRS) Ginger Company is completing the preparation ofits draft financial statements for the year ended December 31, Sony The Gnancial statements are authorised for issue on Ring 31,2014, On March 15, 2014, a dividend of PI,750,000 was declared land a contractual profit share payment ofP0,000 was sae th based on the profit for the year ended! December 2013. On February 1, 2014, a customer went ints eerdetcs hhaving owed the entity P540,000 for the past S mente ae allowance had been made b financial statoments, On March 20, manufacturing lant was destroyed by fre resulting in'@ nancial loos ot 2,600,000. What total amount should bo seoqatzed in peae 3 loss for the yoar ended Decomber 31, 010 te meee djusting events after the end of reporting period? 1,780,000 31290,000 & 4 ‘090,000, Problem 3-47 GAA) Dubai Company purchased an oil rig for 5,000,000 on January 1, 2013. The life of the rigs 10 yours god th expected cost to dismantle the rig at the end of 10 yoars 1,000,000. The appropriate discount rate for the ence 10%. The present value of the dismantling coat at 10% 'P385,000. What expense should be recorded in the caren year as a result of thoes events? a. Depreciation expense of P600,000. 'b. Depreciation expense of P500,000 and interest expense of P38,500, ation expense of P500,000 and interest expense epreciation expense of P538,600 end interext expense of P38,600,