CHAPTER 1 PROVISIONS, CONTINGENCIES AND OTHER LIABILITIES ————_— Learning Outcomes | “After reading this chapter, ou shouldbe able to 1. recall the definition of abilities 2. distinguish provisions from contingent abilities 6y applying the recognition criteria for liabilities 5. account for different non-financial Fabiities, such as Gability for bonuses, taxes, warranties, premium claims, discount ‘vouchers, gift certificates, deposits and dividends; describe the nature of contingent assets and identify disclosure requirements relating to contingent abilities and contingent assets identify disclosure requirements relating to provisions, contingent liabilities, and Gabiites relating to contracts with customers. “ta Introduction ‘As discussed in Chapter 5 of Volume 1 of the Intermediate ‘Accounting Series and based on the New Conceptual Framework of the International Accounting Standards Board (IASB), a liability is a present obligation on an entity to transfer an economic resource as a result of past event. Chapter 5 of Volume 1 also discusses the recognition, Ineasurement and presentation of financial liabilities in the financial statements. ‘This chapter discusses provisions, contingencies and some non- financial liabilities. Liabilities relating to leases, income taxes, employee benefits and share options are discussed in separate chapters of this book. RECOGNITION In accordance with the recognition criteria in the Conceptual Framework, an item of a liability is recognized in the financial statements ifi : : ‘Chapter 1 ~ Provisions, Contingencies and Other Liabilities - (a) _ it meets the definition of a liability; (b) it provides useful information that is relevant and faithfully represented; (c) ‘the benefits from such information justify the cost of obtaining the information and (@) itis measurable. Financial liabilities are initially recognized at cost, being the fair value of assets or services received in exchange for liabilities incurred, or when necessary at the fair value of the liability incurred at the date of initial recognition. Non-financial liabilities are initially recognized and arc subsequently measured at an assigned monetary amount, which in some instances, must be estimated. The use of estimates does not undermine the reliability of the financial statements. In other instances, the ‘timing of the settlement such obligations may not be certain, as in obligations for product warranties, where customers are allowed to avail of the warranty within a specified period but not necessarily at a definite date. The uncertainty of the timing and/or the amount of the obligation does not disqualify the obligation to be recognized as accounting liabilities. Provisions Distinguished from Contingent Liabilities Obligations involving uncertainties are either provisions or contingent liabilities. When it is probable that an outflow of resources embodying economic benefits will result from the settlement of an obligation, but the amount of the outflow could be measured only based on reasonable estimates, or the timing of the settlement is not definite, the obligation is recognized as a provision. A provision is a liability whose existence as of the reporting date is certain (because it meets the definition of a liability) but is uncertain as to timing or amount. The amount of the obligation must at least be reliably estimable for it to be recognized as a liability. When (a) the existence of the obligation is uncertain as of the end of the reporting period, or (b) when the amount of the obligation cannot be reliably estimated, even if it is probable to result in an outflow of resources embodying cconomic benefits, no recognition of obligation is required in the financial statements. The item is one of a contingent liability. In the first instance (a), the item is not qualified to be recognized as a liability because it does not meet the definition of a liability, as there is no present obligation yet as of the reporting date. In the second instance (b), the item is also not recognized even if it meets the definition of a liability because no reasonable amount can be assigned to the item, even with the use of reliable estimates,Chapter 1 - Provisions, Contingencies and Other Liabilities Contingent liabilities must be assessed continually to determine whether an outflow of resources embodying economic benefits has become probable, thus meeting the definition of a liabilit If it becomes probable that an outflow of future economic benefits will be required for an item previously dealt with as a contingent Ijability, a provision. is recognized in the financial statements of the period in which the change in probability occurs, except in the extremely rare circumstances where no reliable estimate can be made (paragraph 30, IAS 37), For example, during 2019, ABC Company gives a guarantee of certain borrowings of DEF Company, whose financial condition at that time is sound. During 2020, the financial condition of DEF Company deteriorates and at June 30, 2020, DEF Company files for protection from its creditors, At December 31, 2019, the obligating event is the giving of the guarantee that gives rise to a legal obligation. However, no outflow of benefits is probable on this date; thus, no provision is recognized. ‘The guarantee is disclosed as a continent liability, unless the probability of any outflow is regarded as remote. At December 31, 2020, however, it has become probable that an outflow of resources embodying economic benefits will be required to settle the obligation, thus the item meets already the definition of a Liability. On this date, a provision is recognized for the best estimate of the obligation, Similarly, provisions should be reviewed at the end of each reporting period and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision should be reversed. The reversal is treated as a change in accounting estimate and will affect the profit or logs of the current period. The table overleaf summarizes the distinction between a provision and a contingent liability,Chapter 1 - Provisions, Contingencies and Other. Liabiliti Provision A eS ee Contingent Liability Definition A liability of uncertain timing or amount Either ‘a) a possible obligation that arises from past events and whose existence will ‘be confirmed only by the ‘occurrence or non- occurrence of one or more future events not wholly within the control of the enterprise; or b) a present obligation that arises from past events but is not recognized because + it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or + the amount of the obligation cannot be measured reliably. Recognition Recognized as @ liability on the face of the statement of financial position ‘Not recognized as a liability on the face of the statement of financial position Financial statement presentation Presented separately in the statement of financial position under liabilities Unless remote, disclosed in the notes to the financial statementsChapter 1 - Provisions, Contingencies and Other Liabilities ‘Thus, based on the foregoing table, obligations involving uncertainties are accounted for as follows: i Status Reliably measurable Record by debiting an expense or a loss and Probable crediting a liability Not reliably measurable Reasonably Disclose in the notes to possible financial statements Ignore (Neither recognize nor disclose) Remote MEASUREMENT Liabilities are initially measured (1) at amounts established in exchanges (at cost) (2) __ by estimates of a definitive character when the amount of the liability cannot be measured more precisely (deemed cost for provisions) Measurement of Provisions + The amount recognized as a provision should be the best ‘estimate of the expenditure required to settle the obligation at the end of the reporting period, considering ‘9 judgment of the management of the enterprise; o experience of similar transactions; or © reports from independent experts, + Ifa single obligation is being measured, the amount to be recognized as a liability is the most likely outcome. + Where the amount of the obligation is still uncertain as of the end of the reporting period, but the obligation is settled Subsequently before the issuance of the financial statements, the amount shown in the statement of financial position is the amount actually settled subsequently.! Chapter 1 - Provisions, Contingencies and Other Liabilities Case 1 In September 2020, Howell filed a suit against Blue + Where the provision being measured involves a large population OL items, the obligation is estimated by weighting all possible Gutcomes by theit associated possibilities (statistical method Called “expected value’). Where there is a continuous range of possible outcomes, and each point in that range is as likely as Eny other, the midpoint of the range is used + Where the effect of the time value of money is material, the amount of a provision should be the present value of the expenditures expected to be required to settle the obligation. + Where some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the Teimbursement should be recognized when, and only when, it is virtually certain that reimbursement will be received if the enterprise settles the obligation, The reimbursement, if virtually certain, should be treated as a separate assct. The amount recognized for the reimbursement should not exceed the amount of the provision, ‘The following illustrates the principles discussed: Company, alleging violation of patent rights and it is seeking payment for damages of 7,000,000. Blue disclaims the charges and the legal counsel advises that as of the date of the issuance of Blue Company's financial ‘Statements, it is probable that the enterprise will not be ‘found liable. “No. provision is recognized, because based on the evidence available as of the financial statement date, there is no obligation as a result of past events. The matter is disclosed as a contingent liability, unless the probability of any outflow is regarded as remote. Case 2. ‘ABC Company operates in a city where there is no environmental legislation. However, the company has a widely published policy in which it undertakes to clean up dail contamination it causes. As of the date of the issuance of its 2020 financial statements, a reasonable estimate of the cost of this clean up related to 2020 operations is ‘2,000,000. A provision is recognized for the estimated amount of the costs of the clean-up, which is P2,000,000. The obligating event is one of a constructive obligation. The entry for the recognition of the provision isChapter 1 ~ Provisions, Contingencies and Other Liabil Environmental Clean-Up Expense 2,000,000 Provision for Environmental Clean up 2,000,000 As a result of an uninsured accident during the year 2020, personal injury suit for P3,000,000 has been filed against XYZ Company. It is the judgment of the company’s legal counsel that an unfavorable verdict will result in a loss ranging from 1,800,000 to P2,800,000, The lawyer believes that the most reasonable estimate is P2,200,000. A provision is recognized for the best estimate of the obligation. The best estimate is the most likely outcome which is P2,200,000. The entry for the provision is Loss from Accident 2,200,000 Provision for Damage 100,000 Additional possible obligation of P600,000 (the difference between the recorded amount of P2,200,000 and the highest in the range of estimated amounts of P2,800,000) is to be disclosed in the notes to the financial statements. GHI Company sells goods with a warranty under which customers are covered for the cost of any manufacturing defects that become apparent within the first year after Purchase. If minor defects were detected in ail products sold, repair costs of P2 million would result. If major defects were detected in all products sold, repair costs of PS million would result. The enterprise’s past experience and future expectations indicate that 60% of the goods sold have no defects, 30% of the goods sold have minor defects, and 10% of the goods sold have major defects. It is probable that the sale of defective merchandise will result in an outflow of economic benefits, Thus, the sale created an obligation. The best estimate of the obligation is the “expected value of the outcome,” which is derived by weighting all possible outcomes by their associated probabilities. Thus, the provision shall be measured as follows: No defects PO x 60% P 0 Minor defects P2M x 30% 600,000 Major defects PSM x 10% 500,000 Amount of provision 1,100,000Chapter 1 - Provisions, Contingencies and Other Liabilities ‘The entry to recognize the provision is Warranty Expense 1,100,000 Provision for Warranty onee (or Estimated Liability Under heal Warranty) 1,100,000 see Coma Case 5. JEL is charged with multiple lawsuit because of an incident cae that happened in February 2020, causing death of about © Tabi 80 persons due to stampede in a sales promotion program Scape it was airing through Channel 6 on February 10, 2020. Based on similar incidents suffered by other entities, JKL's ‘Liab legal counsels are of the opinion that it is probable that JKL would be found liable for the incident. As of the date of the issuance of the 2020 financial statements, a reasonable iiadd estimate of the obligation is between P16,000,000 to aher’ P24,000,000. Each point within the range is as likely as oa any other. are operat The provision being measured above involves a large sno population of items and there is a continuous range of Exped possible outcomes. There is no better estimate in the oa pa range, and cach point within that range is as likely as any other point. Thus, the provision shall be measured at the midpoint of the range. The midpoint is the simple average or the mean, thus P40,000,000 (P16,000,000 + 24,000,000) divided by 2 equals P20,000,000. 2,00 The entry to set up the provision is ‘Coad Loss from Damages 20,000,000 Provision for Damages 20,000,000 Review of the Amount Previously Recognized as Provision Case 4 If based on subsequent review of the amount of the provision, there is a need to adjust the previously recorded amount, the adjustment is treated as a change in accounting estimate and would affect profit or loss of the current year. Thus, if based on the review of the provision, the amount needs to be decreased, the entry in a subsequent reporting period is to debit the provision and credit an appropriate expense, loss or in some cases, an income account. If at the end of the reporting period, it is no longer probable that an outflow of resources will be required to settle the obligation, the provision previously recognized should be reversed.90,000 incident of about program 2, 2020. s, JKL’s that JKL te of the sonable ,000 to tkely as a large range of in the ikely as easured e simple 10,000 + 900,000 rovision, pnt, the id would review of my ina edit an able that tion, the Chapter 1 - Provisions, Contingencies and Other Liabilities Accrued Liabilities Accrued liabilities consist of obligations for expenses incurred on or before the end of the reporting period but payable at a later date, Accrued liabilities include those payables to specific persons and determinable with reasonable accuracy. They also include provisions, Common examples of liabilities of this nature are accrued salaries, accrued interests, accrued rentals, and accrued taxes. An accrued liability is taken up as an adjustment at year-end by charging an expense account and crediting an accrued liability account, Liability for Bonuses As incentives to officers and managers, many companies ‘ablish a bonus agreement, with the bonus usually payable shortly after the end of the year. The amount of bonus may be based on the amount of revenue or profit of the enterprise. This bonus is, in effect, Part of salaries or compensation expense and is reported as an Operating expense of the company. The bonus, if unpaid at year-end, Should be accrued by debiting Compensation Expense (or Bonus Expense) and crediting Bonus Payable. The amount of bonus, if based on profit, is computed using different possible formulas. To illustrate, assume the following data for ABC Corporation: Profit before deducting bonus (B) and income tax (T) is 2,000,000. Bonus rate is 10% and income tax rate is 30%. Case 1 Boniis is based on profit before deducting bonus and income 10 x 2,000,000 = 200,000 .30 x (2,000,000 ~ 200,000) = 540,000 Bonus is based on profit after deducting bonus but before deducting income tax B 10 x (2,000,000 ~ B) 200,000 - .10B 200,000/1.10 = 181,818 30 x (2,000,000 ~ 181,818) = 545,455ns, Contingencies and Other Liabilities case 3, Bonus is based on profit before deducting bonus but after deducting income tax. 10 (2,000,000 - 7) 30 (2,000,000 - B) 10 [2,000,000 - .30 (2,000,000 ~ B)] 10 (2,000,000 - 600,000 + .30B) 140,000 + .03B 140,000/.97= 144,330 30 (2,000,000 - 144,330) = 556,701 ‘To check the amount of the bonus: Profit before bonus and income tax P2,000;000 Less: Income tax 556,701 Profit before bonus and after income tax 1,443,299 x___.10% Bonus rate P_144,330 Bonus case 4, Bonus is based on profit after deducting both bonus and income tax. B 10 (2,000,000 - B-T) T 30 (2,000,000 ~ B) 10 [2,000,000 - B - .30 (2,000,000 - B}] 10 (2,000,000 ~ B - 600,000 + .3B) 140,000 - .07B 140,000/1.07 = 130,841 30 (2,000,000 - 130,841) = 560,748 ‘To check the amount of the bonus: Profit before bonus and income tax 2,000,000 Less: Bonus "130,841 Profit after bonus and before income tax 1,869,159 Less: Income tax (30% x P1,869, 159) 560,748 Profit after bonus and income tax 1,308,411 Bonus rate Bonus P_130,841900,000 130,841 869,159 560,748 308,411 10% Chapter 1 - Provisions, Contingencies and Other Liabilities Taxes and Employee-Related Liabilities Value-added Taxes Value added taxes (VAT) are levied on the sale of goods and certain services. VAT must be collected from the customet by the seller certain sfved, on a monthly basis, to the proper government authority fie, Bureau of Internal Revenue). The VAT payable is reported as Carvent liability until the value added taxes are remitted to the BIR in Bae ving period awarding mileage for ie privilege lated from . therefore, nd services mers, the ed when (or transaction performance e obligation. ng prices of us, when an al goods or an entity for sold and the fair value of -used for the jnitially as 2 ts customers emable in the sumulate and merchandise current year, Pair values of md P120,000, Chapter 1 - Provisions, Contingeneles and Other Liabilitie Allocation: 24,000,000 x P23,880,000/P24,0000,000 23,880,000 $24'000,000 x P120,000/P24,000,0000 ___ 120,000 Total 24,000,000 ‘The journal entry at the time of sale is as follows: Cash 24,000,000 Sales 23,880,000 Liability for Customer Loyalty Awards 120,000 By the end of the first year, 45% of the points, hove been redeemed, and it is expected that only a total of 90% of the polit Granted will be redeemed by the customers, SM recognises rer ine for points redeemed at P60,000 (which is 45%/90% x 120,000). The entry for the redemption is: Liabitity for Customer Loyalty Awards 60,000 Sales 60,000 45%/90% x P120,000 If during the second year, the company redeemed an additionat “<0% and it revised its estimate of total points expected to De redeemed se roa%, the company would recognize revenue for this retlemption at 42,000, which is computed as follows: (45% + 40%)/ 100% x P120,000 P102,000 {ees revenue from previous redemption ___60,000 Revenue recognized in the second year P._42,000 if in the third year, the remaining 15% were redeemed, bringing i total redemption to 100%, the total revenue that the compeny would fecognize over the three-year period would be P120,000 ‘Thus, in the Game year, the company recognizes revenue of P8,000 due to sedemption of loyalty awards. ‘Total market value of award points 120,000 Lose: revenue from previous redemptions 102,000 Revenue recognized in the third year 8,000 ‘wards Supplied by a Third Party fan award is supplied by a third party, the amount received a5 Dees sain or goods or services sold is recognized as revenue in full Ben expense is recognized for the points granted to customers,Chapter 1 - Provisions, Contingencies and Other Liabilities Hence, the accounting procedure discussed in the preceding section for) premiums shall apply For example, assume that Petron Gas Station participates in # customer loyalty programme operated by SM Corporation. It grants SM privilege cardholders one point for every P50 spent on fuel. Cardholders can redeem the points for reduction in selling prices of goods to be bought from SM. Petron pays SM P0.50 for each point redeemed ‘Thus, upon sale of fuel to customers, Petron records the full amount of the consideration received as sales and recognizes.an expense for points expected to be redeemed by customers from SM. Books of Petron Books of SM Upon sale of gasoline Cash No entry Sales Books of Petron Books of SM Upon redemption of points Premium Expense xxx Accounts Receivable-Petron x22 Payable to SM vox Cash (if any) sox Sales vox At year-end Premium Expense xxx No entry Premium Claims Outstanding Unearned Revenues The recognition of ravenue from service contracts scope of IFRS 15 Revenue from Contracts with the Customers. IFRS 15, an entity recognizes revenue by applying the following steps" (a) identifying the contract with a customer; (b) identifying performance obligations; (c} determining the transaction price; (@ allocating the transaction price to the performance obligations; and recognizing revenue when (or as) the entity satisfies the performance) obligations. Uneared revenues are amounts collected in advance that have} not yet been earned and recorded as revenues pending satisfaction performance obligations. Examples are collections in advance fe magazine subscriptions, royalties, tickets, tokens, gift certificates, 22ities ng section for ticipates in a It grants SM Cardholders f goods to be int redeemed. fall amount of inse for points SM v SM ‘Petron xxx sox ry ts is within the stomers. Under following steps: identifying the getion price; (d) gations; and (e) the performance vance that have ag satisfaction of in advance for certificates, and Chapter 1 - Provisions, Contingencies and Other Liabilities Service contracts. Thus, based on IFRS 15, no revenue yet is to be Secorded when cash is received in advance before satisfaction of Gecformance obligations. The collection in advance is, therefore S=corded in the following entry: cash woe Unearned Revenue v0 ‘The Revenue and Unearned Revenue accounts are appropriately Gescribed depending on the particular transaction being recorded (e.g. Sebscription Revenue and Unearned Subscription Revenue; Revenue Gem Service Contracts and Unearned Service Contract Revenue, etc.) When (or as) performance obligations are satisfied, the unearned ‘Secount is transferred to a revenue account; hence, this entry Unearned Revenue we Revenue woe ‘The amount earned is measured by determining the amount-of sisaction price allocated to the performance obligation satisfied. te (S= Contificates Outstanding Some retail stores sell gift certificates to customers that are Gesemable in merchandise. The sale of gift certificates creates a Eeeaity in thé books of the retail store. The liability is settled either Geccuch redemption of certificates in exchange for merchandise sold or Beecugh expiration of gift certificates. (Based on Administrative Order We-40 issued by Department of Trade and Industry, all gift certificates eeeed starting July 1, 2012 will no longer have expiry dates Diccawhile gift certificates connected to promos are exempted from the St order.) The journal entries for transactions regarding gift certificates Beestanding are as follows: Upon sale of gift certificates, Cash 200k Unearned Revenue for Gift Certificates Outstanding poor Upon redemption of the gift certificates, the entry is Unearned Revenue for Gift Certificates Outstanding cx Sales voceWhen the gift certificates expire, the entry Unearned Revenue for Gift Certificates Outstanding xxx Gain from Forfeited Gift Certificates soc Any resulting balance in the account Unearned Revenue for Gift Certificates Outstanding is reported in the statement of financial position as current. liabilities, because the account makes a claim against the resources of the enterprise within the period the certificates are outstanding until their expiration. The amount of the liability represents the amount collected from customers for which no revenue has yet been recognized. The balance of the liability is not affected by the cost of goods to be delivered to settle the obligation, The balance of Gain from Forfeited Gift Certificates is presented as part of Miscellaneous Income in the profit or loss statement. To illustrate, assume the following information for Glorietta Corporation for the year 2020. Glorietta has a pricing policy that allows 30% profit on the sales price. Unearned Revenue from Gift Certificates Outstanding, January 1, 2020 P_ 500,000 Gift certificates sold during the year 1,800,000 Gift certificates issued relating to sales promotion during the year 200,000 Gift certificates redeemed during the year 1,800,000 Gift certificates relating to the entity's promo that expired during the year 25,000 Additional outstanding gift certificates expected to expire during 2021 12,000 The following are the entries for the year 2020 related to the foregoing: Cash 1,800,000 Unearned Revenue for Gift Certificates Outstanding 1,800,000 Sold gift certificates Sales Unearned Revenue for Gift Certificates Outstanding Unearned Revenue for Gift Certificates Outstanding Sales Redeemed gift certificates 24ue for Gift F financial sa claim certificates ne liability 30 revenue affected by balance of part of > Glorietta policy that 500,000 800,000 200,000 800,000 25,000 12,000 ted to the Chapter 1 - Provisions, Contingencies and Other Liabilities Unearned Revenue for Gift Certificates Outstanding 25,000 Gain from Forfeited Gift Certificates 25,000 Gift certificates expired during the year The balance of the Unearned Revenue at December 31, 2020 is Semputed as follows: Balance, January 1 P 500,000 Gift certificates issued during the year 2,000,000 Gift certificates redeemed during the year (1,800,000) Gift certificates expired (25,000) Balance, December 31 P_675,000 The company does not recognize yet as revenue the additional SSstanding gift certificates expected to expire in the succeeding year 52.000) as application of prudence suggests that value of these gift SesHicates be recognized in profit or loss at the time the gift certificates secually expire. ‘Beridends Payable A cash dividend payable is an amount owed by a corporation to > sharcholders as a result of the board of directors’ action on the Se bution of corporate earnings in the form of cash. It is recorded 2 recognized in the accounts upon declaration by the Board of Beetors. Cash dividends are usually payable within a relatively short Pes of time from the date of declaration and are, therefore, classified = current liabilities Undeclared cash dividends on cumulative preference shares ‘$etends in arrears) are not recognized as liabilities because there is Ge ebligating event. Dividends in arrears on cumulative preference Ss are simply disclosed in the notes to financial statements. A property dividend and a scrip dividend will likewise result in = creation of a current liability, because they are generally SSS Dutable within a relatively short period of time after declaration $2 would require the outflow of resources for their settlement. A share dividend distributable, is not classified as a liability in Se =atement of financial position, because it will not require outflow = the enterprise of resources embodying economic benefits. The See Bution of such a dividend merely involves issuance of additional ‘Te scounting procedures for the recognition and measurement of liability for PRPS dividends are discussed in Chapter 2, Shareholders’ Equity 25Chapter 1 ~ Provisions, Contingencies and Other Liabilities shares of the entity’s capital without consideration. Share, Dividend: Distributable is presented as part of contributed capital in the equity section of the statement of financial position. Deposits and Advances Deposits and advances consist of cash or property received buf which are returnable to the depositor or which have been collected of) Otherwise accumulated to be remitted to third parties (such as funds held for others). If the deposit or advance results from the company’s operating activities (e.g., deposits on returnable containers received by a compaiiyy whose products, such as San Miguel Beer, Coca-cola and Pepsi Cola ars sold on returnable containers), the liability is normally reported as) current. If the deposit is nontrade and is expected to be refunded om) paid after more than one year (as in the case of deposits to utility Companies and security deposit on long-term leases), the liability & reported as non-current, To illustrate accounting for deposits on returnable containersy assume the information presented below e of Deposits for Returnable Containers, 01/01/19 P250,000% Deposits received for containers of products sold during 2020 800,003 Deposits refunded during 2020 upon return of containers 720, Deposits forfeited for containers not returned within the prescribed period 0,008 Cost of containers not returned within the prescribed period Accumulated depreciation on containers not returned. ‘within the prescribed period ‘The: following are the entries to record the foregoim transactions: cash 800,000 ‘Customer Deposits for Returnable Containers Deposits on returnable containers received during the year. Customer Deposits on Returnable Containers Cash Refunds to customers for containers returned, ‘Customer Deposits on Returnable Containers 60,000 ‘Accum. Depreciation-Returnable Containers 15,000 Returnable Containers Gain on Sale of Returnabte Containersilities hare Dividend [in the equity y received but collected or suich as funds ny’s operating by a company Pepsi Cola are y reported as € refunded or sits to utility he liability is le containers, 9 250,000 2020 800,000 = 720,000 60,000 iod (000 15,000 he foregoing (00 800,000 000 720,000 000 000 55,000 20,000 Chapter 1 ~ Provisions, Contingencies and Other Liabilities Notice that the containers not returned within the prescribed eed are considered sold. The carrying amount of the returnable Geessiners are removed from the accounts and a gain or loss is Peemized for the difference between the deposits forfeited and the Peing amount of the returnable containers. The resulting balance of = account Customer Deposits on Returnable Containers in the Bessation given is P270,000 (P250,000 + P800,000 — P720,000 -— 95.000). The balance is presented in the December 31, 2019 PS ment of financial position as part of current liabilities. |" Pessentation on the Face of the Financial Statements and liabilities are generally classified on the face of the Seta] statements as current and non-current, unless presentation $B on liquidity provides information that is more relevant to the — A liability shall be classified as current when it satisfies any of Hellowing criteria: fa) _it is expected to be settled within the entity's normal operating cycle: (b) _ it is held primarily for the purpose of being traded; (c) _ it is due to be settled within twelve months after the reporting period; or (@) the entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period. Each of the liabilities that is discussed in this chapter shall be Bed as current if it satisfies any of the foregoing criteria, Generally, liabilities for value added tax, SSS and Philhealth utions and withholding taxes payable, accrued bonus, premium outstanding and other obligations resulting from customer awards, and gift certificates outstanding are classified as current s because they are expected to be settled within the entity's d operating cycle. When product warranties extend beyond the of one year and the enterprise has a reasonable basis to estimate Pertion shall be serviced within one year and the portion that will be beyond one year, it may be necessary to split the warranty y into current and non-current. Otherwise, the whole liability for Sty shall be classified as current because the incurrence of the ion arises from the entity's normal operating cycle. Dividends payable (cash and property) outstanding at the Sng date are classified as current liabilities because payment ofChapter 1 - Provisions, Contingencies and Other Liabilities the dividends is expected within the period of less than twelve months. Deposits and advances shall be classified as current or non-current depending on the nature for which the deposit is received. If the deposit requires a delivery of assets classified as current assets or performance of services within the normal operating cycle, the advance is classified asa current liability. Otherwise, it is classified as non-current. CONTINGENT ASSETS A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence oF non-occurrence of one or more uncertain future events not wholly within the control of the enterprise (paragraph 10, IAS 37). An example is a claim that an enterprise is pursuing through legal processes, where the outcome is uncertain. Contingent assets are not recognized in the financial statements since this may result in the recognition of income that may never be realized (paragraph 33, IAS 37). They are continuously assessed to ensure that developments are appropriately reflected in the financial statements. Where the inflow of economic benefits is probable, the contingent asset is disclosed. However, when the realization of income: is virtually certain, the related asset is not a contingency anymore and its recognition is appropriate. DISCLOSURE REQUIREMENTS For each class of provision, an entity should disclose (paragraphs 84 and 85, IAS 37): + the carrying amount at the beginning and end of the period; * additional provisions made in the period, including increases: to existing provisions; amounts used fi.c., incurred and charged against the provision) during the period; ‘unused amounts reversed during the period; the increase during the period in the discounted amount arising from the passage of time and the effect of any change in the discount rate; a brief description of the nature of the obligation and the expected timing of any resulting outflows of economic benefit;elve months. non-current if the deposit performance is classified ent. s from past currence or not wholly 37). An arough legal statements nay never be assessed to the financial robable, the on of income anymore and wld disclose ‘the period; ing increases against the ated amount f any change tion and the of economic Chapter 1 - Provisions, Contingencies and Other Liabilities an indication of the uncertainties about the amount or timing of the outflows. Where necessary to provide adequate information, an entity should disclose the major assumptions made concerning fature events; and the amount of any expected reimbursement, stating the amount of any asset that has been recognized for that expected reimbursement. For each class of contingent liability at the end of the reporting Period, an entity should disclose a brief description of the nature of the contingent liability (unless the possibility of any outflow in settlement is remote), and where practicable (paragraph 86, IAS 37) - = an estimate of its financial effect; * an indication of the uncertainties relating to the amount or timing of any outflow; and ‘+ the possibility of any reimbursement. Where an inflow of economic benefits is probable, an enterprise should disclose a brief description of the nature of the contingent assets at the end of the reporting period and, where practicable, an estimate of their financial effect. For obligations arising from contracts with customers accounted for under-IFRS 15, the entity shall disclose the opening balance of contract liabilities, the amount of revenue recognized during the period that was included in the contract liability at the beginning of the period, and the amount of revenue that is recognized during the period from performance obligations satisfied during the previous periods (e.g. changes in transaction Price). An entity shall disclose, about its performance obligations in contracts with customers, including the nature of goods or services that the entity has promised to transfer, obligations for refunds, returns and other similar obligations, and types of warranties and related obligations,Chapter 1 ~ Provisions, Contingencies and Other Liabilities EXAMPLE OF FINANCIAL STATEMENT PRESENTATION AND DISCLOSURES NGO Corporation presented its current liabilities at December 31, 2020 statement of financial position as follows: In Millions 2019 2020 As Revised PHP PHP Current Liabilities Current portion of long-term debt 120 0 Short-term borrowings 981 627 Other financial liabilities 547 Accounts payable 5,101 Accrued expenses and other liabilities 5,360 Provisions 3,600 15,709 Notes to the Financial Statements Provisions Provisions are recognized when the entity has a present legal or constructive obligation as a result of past events, itis probable that an outflow of resources will be required to settle the obligation and a reliable estimate of the amount cam be made. Where the entity expects a provision to be reimbursed, the feimbursement is recognized as an asset only when the reimbursement is Virtually certain, At each reporting date, the entity assesses the adequacy of is provisions and adjusts the amount as necessary based on actual experience and changes in future estimates. Warranty provisions ‘The entity provides for the estimated liability to repair or replace products under warranty at the time the revenue is recognized. ‘The provision is an estimate! calculated based on historical experience of the level of volumes, product mi and repair and replacement cost. A Intellectual property rights (IPR) provisions The entity provides for the estimated future settlements related to asserted andl unasserted past alleged IPR infringements based on the probable outcome of each infringement. Tax provisions The entity recognizes a provision for tax contingencies based upon the stimated future settlement account at each reporting date.31, 2020 fillions 2019 As Revised PHP onstructive f resources amount can ursed, the rsement is acy of its rience and ucts under a estimate oduct mix serted and uicome of upon the Chapter 1 ~ Provisions, Contingencies and Other Liabilities BeSecuring provisions FEE entity provides for the estimated cost to restructure when a detailed formal $e of restructuring has been completed and the restructuring plan has been Seoanced by the entity BiBe= provisions HP Entity recognizes the estimated liability for non-cancelable purchase SS itments for inventory in excess of forecasted requirements at each Peperiing date. SP catty recognizes a provision for the estimated future settlements related to $s and unasseried Intellectual Property Rights (IPR) infringements, based HPF probable outcome of each case as of each reporting date. Pe ef estimates and critical accounting judgments Bary provisions SS Stity provides for the estimated cost of product warranties at the time the $= is recognized. The entity’s warranty provision is established based Pe best estimates of the amounts necessary to settle future and existing claims FF Fesvcts sold as of each reporting date. As new products incorporating Seek technologies are continuously introduced, as local laws, regulations Pee pesctices may change, changes in these estimates could result in additional ances or changes to recorded allowances being required in future periods. Sion for intellectual property rights, or IPR, infringements Sstity provides for the estimated future settlements related to asserted and ted past alleged IPR infringements based on the probable outcome of Sal infringement. 1PR infringement claims can last for varying periods of SS Sulting in irregular movements in the IPR infringement provision. The BSS outcome or actual cost of settling an individual infringement may Pemally vary from estimates. BeSscontingencies $e proceedings covering a wide range of matters are pending or threatened in PES iwrisdictions against the entity. Provisions are recorded for pending SS on when itis determined that an unfavorable outcome is probable and the Ps of Loss can be reasonably estimated. Due to the inherent uncertain $= oF litigation, the ultimate outcome or actual cost of settlement may + from estimates,Provisions, Contingencies and Other Liabilities KEY TERMS USED IN THIS CHAPTER Contingency. A condition arising from past events that exists at reporting date and gives rise to either a possible asset or a possible liability, the outcome of which will be confirmed only on the occurrence or non-occurrence of one or more uncertain future events that are outside the control of the entity. Contingent asset. A possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non= occurrence of one or more uncertain future events not wholly within the control of the entity (paragraph 10, IAS 37). Contingent liability. A possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; A present obligation that arises from past events but is not recognized because (j) it is not probable that an outflow of resources embodying economic events will be required to settle the obligation, or (ii) the amount of the obligation cannot be measured with sufficient reliability (paragraph 10, IAS 37), Current liability. A liability that satisfies any of the following criteria (a) is expected to be settled in the normal course of the entity's operating cycle; (b) is due or expected to be settled within 12 months after the reporting period; (c) is held primarily for the purpose of being traded; and (d) the entity, as of the end of the reporting period, does not have unconditional right to defer settlement for at least twelve months after the reporting period (paragraph 69, IAS 1). Events after the reporting period. Events, favorable and unfavorable, that oecur between the end of the reporting period and the date when the financial statements are authorized for issue (paragraph 3, IAS 10 Events After the Reporting Period). Guarantee. A commitment to honor an obligation of another party i= the event certain defined conditions are not met. Liability. A present obligation on an entity to transfer an economic resource as a result of past event Non-adjusting events after the reporting period. Events that are indicative of conditions that arose after the reporting period date and, thus would not necessitate adjusting financial statements. Instead, if significant, these would require disclosure (paragraph 3, IAS 10 Events After the Reporting Period). Operating cycle. The average length of time necessary for an entity: to convert cash to inventory, inventory to receivables, and receivables back to cash.Chapter 1 - Provisions, Contingencies and Other Liabilities Performance obligation. A promise in a contract with a customer to transfer to the customer either (a) a good or service (or a bundle of goods or services) that is distinct, or (b) a series of distinct goods or Services that are substantially the same and that have the same pattern of transfer to the customer. Possible loss, A contingent loss based on the occurrence of a future ‘event or events whose likelihood or occurring is more than remote but less than likely. Probable loss. A contingent loss based on the occurrence of a future event or events that are likely to occur. Provision, A liability of uncertain timing or amount (paragraph 10, IAS 37), Remote loss. A contingent loss based on the occurrence of a future event or events whose likelihood of occurring is slight. Restructuring. It is a programme that is planned and controlled by management, and materially changes either (a) the scope of @ business undertaken by an entity; or (b) the manner in which the business is conducted (paragraph 10, IAS 37). Gecarned Revenue. Revenue items, for which cash has been “eceived, but the earning process is expected to be completed in future period/s hat exists at or a possible ‘only on the sertain future gst events and rence or non- wholly within ises from past he occurrence ents not wholly jon that arises is not probable events will De f the obligation agraph 10, IAS slowing criteria: e of the entity's ‘thin 12 months r the purpose of reporting period, ment for at least 69, IAS 1). . favorable and orting period and horized for issue od). f another party in nsfer an economic Events that are orting period date sncial statements: sure (paragraph 3, essary for an entity receivables, andChapter 1 - Provisions, Contingencies and Other Liabilities PROBLEMS Which of the following shall result in recognition of liabilities? (a) Receipt of goods ordered from a supplier. (>) Signing of employment contract by a new employee. (©) Declaration of cash dividends on cumulative preference shares. (¢) Declaration of share dividends on ordinary shares (¢) Declaration of property dividends on ordinary shares, Receipt of goods to be sold for the account of the consignor. Receipt of cash from a customer for goods to be delivered next month, Withholding of taxes on employees’ compensation. Violation of the terms of a contract; it is more likely than not that there will be outflow of resources, amount of such outflow can be reasonably estimated. Violation of the terms of a contract; it is more likely than not that there will be outflow of resources, amount of Such outflow cannot be reasonably estimated, Violation of the terms of a contract; it is less than Probable but more than remote that there will be outflow of economic benefits. Violation of the terms of agreement and, as a result, itis not likely that there will be outflow of economic benefits (m) Sale of goods with product warranty, {o) Receipt of land and building from the city government. (0) Sale of non-refundable tickets for a concert show that will be staged three months from now. () Sale of gift certificates redeemable in merchandise. Determine the amount that will be recognized as a liability in each of the following independent cases. Case 1 In August 2020, the XYZ commenced a suit against DEF for alleged violation of anti-trust laws seeking damages of $2,000,000. DEF denies the allegations, and as of December 31, 2020, it is not likely that DEF will pay any damages as a result of this lawsuit.Chapter 1 ~ Provisions, Contingencies and Other Liabiliti 15. Cleveland, Inc. pays its general manager an annual bonus of 6% of profit after deduction for both bonus and corporate income Car "Ror the year 2020, the company realized profit, of 9,000,000 before said deductions. The income tax rate is 30% REQUIRED: What is the corporate income tax liability at December 31, 2020? ‘On January 1, 2019, Jackson Company introduced a new line of product that carries a three-year warranty against factory Btfects. The product warranties provide assurance that the new fine of product will function as intended based on agreed-upon specifications. Estimated warranty costs related to peso sales are as follows: Toc of sales in the year of sale, 2% of sales in the year after sale, ‘and 3% of sales in the second year after sale. Sales and warranty expenditures for the period 2019 to 2021 were as follows: 2019 2020 2021 Sales 600,000 2,500,000 P3,500,000 ‘Actual warranty expenditures 000 38,000-——112,500) REQUIRED: Prepare journal entries to record the foregoing for years 2019 te 2021, The company’s reporting period is the calendar year. Fillmore Company started selling a new product that carried # twoyear warranty against defects. The warranty provides peecgance that the new product will function as intended based on agreed-upon specifications, Based upon past experience wit other products, the estimated warranty costs related to peso sales are computed as follows: First year of warranty 3% Second year of warranty 5% Total sales and actual warranty repairs for 2019 and 2020 are given:Chapter 1 - Provisions, Contingencies and Other Liabilities Quantity Amount Bottles sold 7,000,000 —P15,000,000 "7" shirts bought for give away 1,500 “[" shirts distributed to customers 1,000 REQUIRED: Prepare journal entries to record the following: fa) purchase of premiums (b) sale of bottles of Accountant Tea (c) distribution of T-shirts Beginning the year 2020, the Polk Company began marketing. new beer called “Serbesa”, Each bottle of beer sells for P30, help promote the product, the management of Polk is offering: special Serbesa beer mug to each customer for every 20 speci marked bottles of Serbesa. Polk estimates that out of 3 300,000 bottles of Serbesa sold during 2020, only 30% of bottle caps will be redeemed. For the year 2020, 5,000 bes mugs were purchased by the company at a total cost 140,000. These 5,000 mugs have a total sales value 200,000. A total of 4,000 mugs were distributed to custor during the year 2020. REQUIRED: fa) What amount of unearned revenue for unrede premiums should Polk report on its December 31, 2 ‘statement of financial position? How much additional sales should Polk recognize distribution of the 4,000 mugs? During the year 2019, the Taylor Company started promotional campaign for the sale of its car wax product, coupon is attached for each unit of car wax sold. For every coupons plus P50, a customer can avail of a bottle of tire bi which sells for P150. Each tire black costs the company Pi The following information relates to the sale of car wax coupons redeemed and expected to be redeemed in the future:jabilities Chapter 1 - Provisions, Contingenci Which of the following sets of conditions would give 196 to the March 15, 2021 accrual of a loss or an expense? n to refinance the "ow shoul Bae ann of av in eannalyctinable a event CEH Ae ore disclosure required separate disclosure infrequently. Consider the following facts., After a wedding 1% 2020, ten people died, possibly as a result of food poise during the + periding reception from products sold by the enterPeae Legal proceedings are started seeking damages fror the enterprise but Procecitemprise disputes the liability. Up to the date of se harisation of the financial statements for the eet ended aarnor ar 31, 2020 issue, the enterprise's lawyers advise that it f probable ‘that the enterprise will not be found liable Soren when the enterprise prepares the financial statements fer the year ended December 31, 2021, its lawyets advise that, owing to developments in the case, it 18 probable that the enterprise will be found liable. ed in the financial le ces others, outflow of d business risk, certificates that are cates lapse one year red revenue account jons? What is the proper disposition for the foregoing facts for the years 2020 and 2021? Lapse of certificates = No provision is recognized in 2020, though the Tistst Decrease May be disclosed as a contingent Hability; # Provision '8 Decrease recognized in 2021 No effect Ne provision is recognized both in 2020 and 2021, No effect though the matter may be disclosed @s & contingent (AICPA Adapted) liability. < A provision is recognized both in 2020 and 2021 for the the advance sale of tet Cetimate of the amount to settle the obligation. mance be reported in Be A provision is recognized in 2020; no provision.’ performance? recognized in 2021 A contingent liability sts expended. ent. of related costs Sn, not recognized. in the financial statements, but is is ioted in the motes, unless the outflow of resources cmbodying economic benefits is considered remot. oceeds jaicpa Adapted) Be Seprtciy exists ao a lablty but its amount or duc date is indeterminate. Be commonly associated with operating: loss SONY forwards. = _is not disclosed in the financial statements. 49Chapter 1 Provisions, Contingencies and Other Liabilities MC12 Pennylane, Inc. is being sued for illness caused to local residents as a result of negligence on the company's part in permitting the Iocal residents to be exposed to highly toxic chemicals from its plant. Pennylane’s lawyer states that it is probable that Pennylane will lose the suit and be found liable for a judgment costing Pennylane anywhere from P400,000 to P2,000,000. However, the lawyer states that the best estimate of the expenditure required to settle the obligation is P1,200,000. As a result of the foregoing facts, Pennylane should accrue a. a provision of P400,000 and disclose an additional contingency of up to P1,600,000. b. a provision of P1,200,000 and disclose an additional contingency of up to P800,000. fa provision of P1,200,000 and not disclose any additional contingency. no provision but disclose a contingency of P400,000 to 2,000,000. Nokia Company has co-signed the mortgage note on the residential house of its president guaranteeing the indebtedness in the event that the president should default. Nokia considers the likelihood of default to be not likely How should the guaranty be treated in Nokia's financ statements? a, Accrued and disclosed b. Accrued only c. Disclosed only d. Neither accrued nor disclosed During 2020, Cooper Company filed a suit against Cupper Company secking damages for patent infringement. At December 31, 2020, Cooper’s legal counsel believed it was probable that Cooper would be successful against Cupper for an Pstimated amount in the range of P7.5 million to P15 million, ‘vith all amounts in the range considered equally likely. In March 2021, Cooper was awarded P10 million and received full payment thereof. In its 2020 financial statements issued in February 2021, how should Cooper report this award? a ‘Asa receivable and revenue of P10 million. b. _ Asa receivable and revenue of P11.25 million. c ‘As a disclosure of contingent gain of P10 million. 4 ‘As a disclosure of a contingent gain of an undetermined amount in the range of P7.5 million to P15 million. 50residents itting the ; from its able that judgment ,000,000. e of the 0. Asa additional additional additional 400,000 to te on the debtedness a considers s financial inst Cupper rent. At eved it was spper for an P15 million, y likely. In received full ry 2021, how dion. undetermined million. MC15 MC16 chapter 1 - Provisions, Contingencies and Other Liabilities During 2020, dispute with t! ad’ visor believed ‘a reasonable estim: could be as mucl qruman Company became involved in a tax he BIR. At December 31, 2020, Truman's tit etn unfavorable outcome was probable and ve of additional taxes was P5,000,000 but niga. P6,500,000. After the 2020 financia) covlsments were issued, Truman received and accepted a BIR settlems What amount of ac a a its December 31, 6,500,000 5,750,000 5,500,000 5,000,000 rent offer of P5,500,000, cerued. liability would Truman have reported 2020 statement of financial position? Use the information given in MC1S. Assume that the comp oy eeScpted the BIR settlement offer of P550,000 before th financial statement! © 2020 s were issued. ‘ What amount of accrued liability would Truman eve reported in vapccember 31, 2020 statement of financial position? a b, a 6,500,000 5,750,000 5,500,000 5,000,000 Eisenhower Company's salaried employees are paid biweekly. Oo pa jecasionally, ayroll deductions Mirances made to employees are paid back Py Information relating to salaries for the calendar year 2020 is as follows: Employee advances 12/31/19 12/31/20 P 24,000 P 36,000 ‘Accrued salaries payable 130,000 2 ‘alaries expense during the year 1,630,000 160,000 Sa aries paid during the year (gross) Ly on December 31, 2020, what amount should Bisenhower report for accrued salaries payable? b. 200,000 188,000 164,000 P 70,000Chapter 1 ~ Provisions, Contingencies and Other Liabilities MC18 Kennedy Company operates a retail store and must de\srncne the proper December 31, 2020 year-end accrual for the following, expenses: + am electric bill of P8,500 covering the period December 16, 3020 through January 15, 2021 was received January 22, 2021. ‘A P4,000 telephone bill was received January 7, 2021, covering: Service in advance for January 2021 1,500 Local and toll calls for December 2020 2,500 in its. December 31, 2020; statement of financial: position: Kennedy should report accrued liabilities of 5,250 P6,750 8,250 11,000 Johnson Company sells contracts agreeing to service equipment Soar tireeiyeat pared: 4) lulurmation) ihe then year ender December 31, 2020 is as follows: Cash receipts from service contracts sold 1,920,000 Service contract revenue recognized 1,560,000 Unearned service contract revenue, January 1 1,080,000 In its December 31, 2020 statement of financial position, what i igunt should Johnson report as unearned service contract revenue? P. 480,000 P_ 780,000 1,100,000 1,440,000 Nixon Company sells 3-year service contracts for air conditioniAg Units for P1,500 each. Sales of service contracts and repairs tke made evenly throughout each year. The company estimates ore vs% of repairs are done in the first year from the date of sale, 35% in the second year and 50% in the third year. Service contracts sold are as follows:Chapter 1 - Provisions, Contingencies and Other Liabilities MC30 The Clinton Company launched a new sales promotional Clinton cuss ceY 10 chewing gum box tone returned to fuinton, customers receive an attractive prin Clinton estimates that 40% of the chewing gum box tops reaching the consumer foatket will not be redeemed. Additions’ information is as follows: Units Amount Sales of chewing gum (in boxes) 3,000,000 3,600,000 Purchase of prizes by Clinton 80,000 40,000 Prizes distributed to customers 42,000 At the end of the year, Clinton recognized a Provision equal to the estimated cost of potential prizes outstanding. What is the amount of this provision? 69,000 following information is available: Reams of bond paper sold purcl Coupons redeemed 400,000 100,000 How much is the estimated liability for premium claims outstanding at December 31, 20202 P 720,000 P1,020,000 P1,800,000 3,600,000 The Barack Food Co. distributes to consumers coupons, which may be presented on or before a stated expiration date to retail putiets (on certain products of Barack. tne retail outlets are i coupons to Barack. In Barack'snotional med to timates nsumer Chapter 1 - Provisions, Contingenctes and Other Liabilities corer: from ithe: dite” it” tedeenis: the (eoupond oni the coupons we feuTing 2020, Barack issued two separate series of coupons as follows Consumer Amount Disbursed Issued.on Total Value Expiration Date 1s of 12/31/20 1/1/20 “P500,000 6/30/20 236,000 7/1/20 720,000 12/31/20 300,000 The only journal entries to date recorded debits to coupon anounk a Sretite tb cab Bf P5396 000) repeating: Get ‘mount disbursed for the coupon redemption, ns December 31, 2020 statement of financial position should include a Liability for Unredeemed Coupons of PO 60,000 124,000 P360,000 Wal Corporation sells washing machines that carry a three-year Sarranty against manufacturer's defects, Based on company Dering oe warranty costs were estimated at P300 per machine During 2020, Bill sold 24,000 washing machines ans paid warranty costs of P1,700,000. Aoats Profit or loss statement for the year ended December 31, 2020, Bill should report warranty expense of a. 1,700,000 b. 2,400,000 ©. 5,500,000 4. 7,200,000 Use the information given in MC 33. Assuming that the warranty ceoberations started in 2020, what is the liability for ‘warranty reported by Bill at December 31, 2020? 1,700,000 P2,400,000 5,500,000 7,200,000Chapter 1 - Provisions, Contingencies and Other Liabilities MC35 Ronald Company estimates its annual warranty expense as 4% of annual net sales. The following data relate to the calendar. year 2020: Net sales P1,500,000 Warranty liability account Balance, 12/31/20 (debit, before adjustment) 10,000 Balance, 12/31/20 (credit, after adjustment) 50,000 Which of the following entries was made to record the 2020 estimated warranty expense? a. Warranty Expense 60,000 Retained Earnings Warranty Liability Warranty Expense 50,000 Retained Earnings 10,000 Warranty Liability 60,000 Warranty Expense 40,000 Warranty Liability 40,000 Warranty Expense 60,000 Warranty Liability 60,000 (Kieso, et. al, 2011) MC36 Gerald, Inc. distributes annual bonuses to its sales manager and two sales agents. The company reported P2,000,000 profit for 2020 before bonuses and income taxes. Income taxes of Gerald, Inc. average 309 How much is the total amount of bonus if bonus of each is computed at 15% of profit after taxes and bonuses? a. P190,045, b. 397,476 P479,087 d.P570,135 Use the same information in MC 36. How much should the sales manager and each sales agent receive, respectively, if the sales manager gets 15% and each sales agent gets 10% of profit fter bonuses but before income taxes? a. P857,143 and P571,428 b. P518,519 and P518,519 c 222,222 and P148,148, d. _P195,000 and P130,000Chapter 1 - Provisions, Contingencies and Other Liabilities MC38 The profit for 2020 of Dwight Company before any deduction for bonus and income tax amounted to P2,500,000. Under an incentive compensation plan, the general manager is entitled to fa year-end bonus of 10% of the profit before deducting the 00,000 bonus but after deducting the income tax. Income tax rate is 30%, 10,000 50,000 ‘The manager’s bonus for 2020 was e 2020 a. P175,000 b. —_-P180,412 c 227,273 d. _ P250.000 Franklin Company sells magazine subscriptions for one- to three- year periods, Cash receipts from subscribers are credited to Magazine Subscriptions Collected in Advance, and this 60,000 account had a balance of P2,400,000 at December 31, 2020, before year-end adjustments. Outstanding subscriptions at December 31, 2020 expire as follows: 40,000 During 2021 - P600,000 2 900,000 60,000 ~ 400, ee) 2023 - 400,000 Si In its December 31, 2020 statement of financial position, what er amount should Franklin report as the balance for magazine grofit for propane ‘Gerald, subscriptions collected in advai P 500,000 1,200,000 —* 1,900,000 2,400,000 Use the same information given in MC 89. What amount should iin report as magazine subscriptions revenue for the year ‘ended December 31, 2020? a. P-_ 500,000 puld the b. 1,200,000 yy, if the c 1,900,000 of profit d. —_P2,400,000 Victory Company is the defendant in a patent infringement suit filed by Pitfall Company in 2019. At December 31, 2019, Victory determined that Pitfall would probably be successful against Victory for an estimated amount of P5,000,000. Victory appropriately accrued the loss for the year ended December 31Chapter 1 - Provisions, Contingencies and Other Liabilities 2019. On October 31, 2020, Victory Company and Pitfall Company agreed to a settlement for a cash payment of 3,800,000 and the transfer of Victory’s patent to Pitfall Company. On such date, the patent had a carrying value of 2,000,000. What would be the effect of this settlement on Victory’s profit for the year ended December'31, 2020? No effect Increase of P1,800,000 Decrease of P2,000,000 Decrease of P800,000