lOMoARcPSD|34021653 lOMoARcPSD|34021653

CHAPTER 7 - Problems are derived from the book of Roque, Auditing Problems
Audit of Liabilities.
1. Debt Classifications
BOOMERANG, INC. is a manufacturer and retailer of household furniture. Your audit of the company's financial
statements for the year ended December 31, 2014, discloses the following debt obligations of the company at the
end of its reporting period. Boomerang's financial statements are authorized for issuance on March 6, 2015.
1. A P150,000 short-term obligation due on March 1, 2015. Its maturity could be extended to March 1,
2017, provided Boomerang agrees to provide additional collateral. On February 12, 2015, an agreement
was reached to extend the loan's maturity to March 1, 2017. CURRENT
2. A short-term obligation of P3,600,000 in the form of notes payable due February 5, 2015. The
company issued 75,000 ordinary shares for P36 per share on January 25, 2015. The proceeds from the
issuance, plus P900,000 cash, were used to fully settle the debt on February 5, 2015. CURRENT
3. A long-term obligation of P2,500,000 on December 1, 2014. On November 10, 2014, Boomerang
breaches a covenant on its debt obligation and the loan becomes payable on demand. An agreement
Chapter 7- Audprob Liabilities was reached to provide a waiver of the breach on December 11, 2014. NON-CURRENT
4. A long-term obligation of P4,000,000. The loan is maturing over 4 years in the amount of P1,000,000
per year. The loan is dated September 1, 2014, and the first maturity date is September 1, 2015. 3M/NC
& 1M/C
5. A debt obligation of P1,000,000 maturing on December 31, 2017. The debt is callable on demand by
the lender at any time. CURRENT
1. What amount of current liabilities should be reported on the December 31, 2014, statement of financial
Accountancy (STI College) position? P 5,750,000
2. What amount of noncurrent liabilities should be reported on the December 31, 2014, statement of financial
position? P5,500,000

2. Current Liabilities
The data below are from the records of ALMANOR, INC. on December 31, 2014:
Accounts payable P 680,000 CURRENT
Cash balance, ABC Bank P 1,240,000
Cash overdraft with XYZ Bank P 80,000 CURRENT
Customers' accounts with credit balances P 25,000 CURRENT
Dividends in arrears on preference shares P 400,000
Employees' income tax payable P 100,000 CURRENT
Estimated warranty payable P 50,000 CURRENT
Scan to open on Studocu Estimated premium claims outstanding P 90,000 CURRENT
Income tax payable P 400,000 CURRENT
Notes payable (issued in 2014 maturing in 20 semi-annual installments
beginning on April 1, 2015) P 4,000,000 /(20×2) = P 400,000 CURRENT
Salaries payable P 400,000 CURRENT
The amount to be shown as total current liabilities on Almanor's statement of financial position at December
31, 2014, is P2,225,000

3. Recording Purchases
SAIMAA CORP. records its purchases at gross amounts but wishes to change to recording purchases net of
purchase discounts. Discounts on purchases recorded from January 1, 2014 to December 31, 2014, totaled
P80,000. Of this amount, P8,000 is still available in the accounts payable balance. The balances in Saimaa's
accounts as of and for the year ended December 31, 2014, before conversion are:
Purchases P 4,000,000 Purchase discounts P 32,000 Accounts payable P 1,200,000
1. The amount of purchase discounts lost to be recognized is P40,000 The total discounts for the year is 80,000,
32,000 were taken while only 8,000 are still available. Thus, the half 40,000 portion is considered loss.
2. The accounts payable balance should be reduced by P 8,000 A/P for the year should be reported net of
discounts still available.
3. The purchases account should be reduced by P 80,000 Under net method, purchases are recorded net of
discounts whether taken or not.
4. The entry to record the conversion is
Dr Purchase loss 40,000 Dr Purchase discount 32,000 Dr Accounts payable 8,000
Cr Purchases 80,000

4. Accrued Expenses
ANGLIN CORPORATION must determine the December 31, 2014, year-end accruals for advertising and rent
expenses. A P50,000 advertising bill was received January 10, 2015, comprising costs of P37,500 for
advertisements in December 2014 issues, and P12,500 for advertisements in January 2015 issues of the
newspaper.

A store lease, effective December 16, 2013, calls for fixed rent of P120,000 per month, payable one month from
the effective date and monthly thereafter. In addition, rent equal to 5% of net sales over P6,000,000 per calendar

Studocu is not sponsored or endorsed by any college or university

Downloaded by Roselene Lanson ([email protected]) Downloaded by Roselene Lanson ([email protected])
lOMoARcPSD|34021653 lOMoARcPSD|34021653

year is payable on January 31 of the following year. Net sales for 2014 were P7,500,000. Lease Bonus
75,000 payable on January 31, 2015 + 60,000 Dec 16 to 30, 2014 payable on January 15, 2015 9. Various Transactions Involving Current Liabilities
What is the total accrued liabilities that should be reported by Anglin Corporation in its statement of financial Described below are certain transactions of ASHBY COMPANY:
position as at December 31, 2014? P 172,500 Feb. 2 The company purchased goods from Happy Corp. for P150,000 subject to cash discount terms
of 2/10, n/30. The company records purchases and accounts payable at net amounts after cash
5. Bonus Computation discounts. The invoice was paid on February 25.
Ana Rosa, president of the APOPKA COMPANY, has a bonus arrangement with the company under which she Feb 2 Dr Purchases 147,000 Cr Accounts Payable 147,000
receives 10% of the net income (after deducting taxes and bonuses) each year. For the current year, the net Feb 25 Dr Accounts Payable 147,000 Dr Discount Loss 3,000 Cr Cash 150,000
income before deducting either the provision for Income taxes or the bonus is P4,650,000. The bonus is April 1 The company purchased a truck for P120,000 from Broom Motors Corp., paying P12,000 in
deductible for tax purposes, and the tax rate is 30% cash and signing a one-year, 12% note for the balance of the purchase price.
1. Determine the amount of Ana Rosa's bonus. April 1 Dr Truck 120,000 Cr Notes Payable 108,000 Cr Cash 12,000
B=10%(NI-B-T) and T=30%(NI-B) B=325,500-0.07B Dec 31 Dr Interest expense (9/12) 9,720 Cr Accrued Interest 9,720 (108k*12%)(9/12)
T=1,395,000 - 30%B 1B+0.07B=325,500 May 1 The company borrowed P240,000 from Manila Bank by signing a P276,000 noninterest-bearing
B=10%(4,650,000-B-(1,395,000 -30%B)) 1.07B=325,500 note due one year from May 1.
B=465,000-0.10B-139,500-0.03B B=304,206 May 1 Dr Cash 240,000 Dr Discount 36,000 Cr Notes Payable 276,000
2. Compute the appropriate provision for income tax for the year. Dec 31 Dr Interest Expense 24,000 Cr Accrued Interest 24,000
T=30%(NI-B) T=30%(4,650,000-304,207) T=1,303,738 Aug. 1 The company's board of directors declared a P900,000 cash dividend that was payable on
3. Prepare the entry to record the bonus (which will be paid in the following year). September 10 to shareholders of record on August 31.
Dr Bonus Expense 304, 206 Cr Bonus Payable 304,206 Aug 1 Dr Retained Income 900,000 Cr Dividends Payable 900,000

6. Premiums 10. Warranties

PUKAKI COMPANY sold 700,000 boxes of "puto max" under a new sales promotional program. Each box Presented below are two independent situations. Answer the questions at the end of each situation.
contains one coupon, which if submitted with P40, entitles the customer to a kitchen knife. Pukaki pays P60 per Situation 1: BARRADO CO., a machinery dealer, sells a machine for P22,200 under a 1-year warranty contract
knife and P5 for handing and shipping. Pukaki estimates that 70% of the coupons will be redeemed, even that requires the company to replace all defective parts and to provide the necessary repair labor at no cost
though only 250,000 coupons had been processed during 2014. to the customers. With sales being made evenly throughout the year, Barrado sells for cash 600 machines in
How much should Pukaki report as liability for unredeemed coupons at December 31, 2014 P6,000,000 2014 (half of the warranty expense is incurred in 2014, half in 2015). On the basis of past experience, the 1- year
700,000 Coupons × 70% redemption rate = 490,000 redeemable coupons warranty costs are estimated to be P510 parts and P660 labor. Assume that in 2014, these warranty costs
To be redeemed: 490,000-250,000=240,000 coupons, Net Cost (65-40) =25 are incurred exactly as estimated.
Liability = 6,000,000 = 240,000×25 1. What amount of warranty expense would be charged against 2014 revenue?
600+510=1,170*600 = 702,000
7. Premiums 2. What amount of warranty liability would appear on the December 31, 2014, statement of
In packages of its products, PLACID, INC. includes coupons that may be presented at retail stores to obtain financial position? 702,000×½ = 351,000
discounts on other Placid products. Retailers are reimbursed for the face amount of coupons redeemed plus Situation 2: DP, INC., a dealer of household appliances, sells washing machines at an average price of P8,100.
10% of that amount for handling costs. Placid honors requests for coupon redemption by retailers up to 3 The company also offers to each customer a separate 3-year warranty contract for P810 that requires the
months after the consumer expiration date. Placid estimates that 60% of all coupons issued will ultimately be company to provide periodic maintenance services and to replace defective parts. During 2014, DP sold 300
redeemed. Information relating to coupons issued by Placid during 2014 is as follows: washing machines and 270 warranty contracts for cash. The company estimates that the warranty costs are
Consumer expiration date Dec. 31, 2013 P180 for parts and P360 for labor.
Total payments to retailers as of Dec. 31, 2014 P 165,000 Assume sales occurred on December 31, 2014. DP's policy is to recognize income from the warranties on a
Liability for unredeemed coupons as of Dec. 31, 2014 P 99,000 straight-line basis. In 2015, DP incurred actual costs relative to 2014 warranty sales of P18,000 for parts and
What is the total face amount of coupons issued by Placid, Inc. in 2014 P 400,000 P36,000 for labor.
Liability for unredeemed coupons 99,000 1. What liability relative to these transactions would appear on the December 31, 2014, statement of
Total payments to retailers 165,000 financial position and how would it be classified?
Total cost 264,000 Sold warranties 270 × 810 = 218,700
Less handling cost (264k×10/110) 24,000 Current = 218,700*⅓ = 72,900
To be redeemed 240,000 Non-current = 218,700*⅔ = 145,800
Divide redemption rate 60% 2. What amount of warranty expense would be shown on the income statement for the year ended
Total issued coupons 400,000 December 31, 2015? P 54,000 = 18,000 + 36,000
3. What liability relative to the 2014 warranties would appear on the December 31, 2015, statement of
8. Liability for Returnable Containers financial position and how would it be classified?
OMEGA COMPANY sells its products in expensive, reusable containers. The customer is charged a deposit for Current 72,900 Non-current 72,900
each container delivered and receives a refund for each container returned within two years after the year of
delivery. Omega accounts for the containers not returned within the time limit as being sold at the deposit 11. Accounting for Warranties and Premiums
amount. Information for 2014 is as follows: OLSON MUSIC EMPORIUM carries a wide variety of musical instruments, sound reproduction equipment,
Containers held by customers at December 31, 2013, from deliveries in: recorded music, and sheet music. To promote the sale of its products, Olson uses two promotion techniques:
2012, 85,000 2013, 240,000 = 325,000 premiums and warranties.
Containers delivered in 2014 430,000 PREMIUMS
Containers returned in 2014 from deliveries in: The premium is offered on the recorded and sheet music. Customers receive a coupon for each P10 spent
2012, 57,500 2013, 140,000 2014, 157,000 = 354,500 on recorded music and sheet music. Customers may exchange 200 coupons and P200 for a CD player.
1. How much revenue from container sales should be recognized for 2014? Olson pays P340 for each CD player and estimates that 60% of the coupors given to customers will be
P 27,500 = 85,000-57,500 redeemed. A total of 6,500 CD players used in the premium program were purchased during the year and
2. What is the total amount of Omega Company's liability for returnable containers as of December 31, 2014? there were 1,200,000 coupons redeemed in 2014.
Delivered, 2013 325,000
Delivered, 2014 430,000 WARRANTIES
Total 755,000 Musical instruments and sound reproduction equipment are sold with a one-year warranty for replacement of
Less: Returned Containers 354,500 parts and labor. The estimated warranty cost, based on past experience, is 2% of sales. Replacement parts and
Less: Revenue, 2014 27,500 labor for warranty work totaled P1,640,000 during 2014.
Liability for returnable containers 373,000

Downloaded by Roselene Lanson ([email protected]) Downloaded by Roselene Lanson ([email protected])

 lOMoARcPSD|34021653 lOMoARcPSD|34021653

Olson uses the accrual method to account for the warranty and premium costs for financial reporting purposes. 2. On May 1, the corporation borrowed P800,000 from Prudent Bank by signing a P920,000
Olson's sales for 2014 totaled P72,000,000: P54,000,000 from musical instruments and sound reproduction noninterest-bearing note due one year from May
equipment and P18,000,000 from recorded music and sheet music. The balances in the accounts related to May 1 Dr Cash 800,000 Dr Discount 120,000 Cr Notes Payable 920,000
warranties and premiums on January 1, 2014, were as shown below: Dec 31 Dr Interest Expense 80,000 Cr Discount 80,000
Inventory of premium CD players P 399,500
Estimated premium claims outstanding P 448,000 16. Provisions
Estimated liability from warranties P 1,360,000 You are engaged to audit the December 31, 2014, financial statements of MILANI COMPANY, a manufacturer of
1. Warranty Expense = Sales 54,000,000*2% = 1,080,000 household appliances. Your audit disclosed the following situations.
2. Estimated liability from warranties =
(Beg Bal 1,360,000 + 1,080,000 - 2014) - Actual Cost 1,640,000 = Liability 800,000 1. In June 2014, the company began producing and selling a new line of dishwasher. By the end of the year, it
3. Premium expense had sold 120,000 to various dealers for P15,000 each. The product was sold under a 1-year warranty, and the
Issued Coupons = 18,000,000/P 10 = 1,800,000*Redemption rate 60% = 1,080,000 company estimates warranty costs to be P750 per dishwasher, Milani had paid out P30 million in warranty
Estimated to be redeemed 1,080,000/200 coupons = 5,400 expenses as of December 31, 2014, which is also the amount shown as warranty expense in its income
Estimated CD players to be issued 5,400*Net cost (340-200) 140 = 756,000 statement for the current year.
Premium expense 756,000 2. In response to your letter of audit inquiry, Milani's lawyer informed you that the company is involved in a lawsuit
4. Inventory of premium CD players for violating environmental laws regulating hazardous waste. Although the litigation is pending, Milani's lawyer is
Beg Bal 399,500 certain that Milani will most probably have to pay cleanup costs and fines of P5,500,000. Milani neither
Plus Purchased CD (6,500*340) 2,210,000 accrued nor disclosed this loss in the financial statements.
Less Issued CD through Redemption (1,200,000/200) =6,000*340= 2,040,000 3. Milani is the defendant in a patent infringement suit by Megan Yang over Milani's use of a hydraulic
End Bal: 569,500 compressor in several of its manufactured appliances. Milani's lawyer informed you that if the suit goes against
5. Estimated premium claims outstanding your audit client, the loss may be as much as P10 million. However, the lawyer believes that the loss of this suit is
Beg Bal 448,000 only possible. Milani did not in any way disclose this pending litigation in its financial statements.
Plus Premium Expense, 2014 756,000
Less: Redeemed (1,200,000/200=6,000×140) = 840,000 Warranty Expense 120,000*750=90,000,000 Warranty Liability 90,000,000-30,000,000=60,000,000
Estimated premium claims outstanding, Dec 2014 364,000 Lawsuit Liability = 5,500,000

12. Accounting for Noninterest-bearing Note 17. Loss Contingency

On December 31, 2014, BAIKAL COMPANY acquired a piece of equipment from Seller Company by issuing a On November 1, 2014, 69 passengers on CANYON AIRLINES Flight No. 143 were injured upon landing when
P1,200,000 note, payable in full on December 31, 2018. Baikal's credit rating permits it to borrow funds from its the plane skidded off the runway. Personal injury suits for damages totaling P10,000,000 were filed on January
several lines of credit at 10%. The equipment is expected to have a 5-year life and a P150,000 salvage value. 12, 2015, against the airline by 21 injured passengers. The airline carries no insurance. Legal counsel has
The present value of 1 at 10% for 4 periods is 0.68301. studied each suit and advised Canyon that it can reasonably expect to pay 70% of the damages claimed. The
Entry: Dr 819,720 Dr Discount 380,280 Cr Notes Payable 1,200,000 financial statements for the year ended December 31, 2014, were authorized for issue on February 12, 2015.
1. What is the equipment's book value on December 31, 2016? During the past decade, the company has experienced at least one accident per year and incurred average
Equipment 819,612 Less Accu Dep (819,612-150,000)*⅖=267,845 = 551,767 damages of P4,100,000.
2. What is the carrying value of the note at December 31, 2016? 991,730 1. Prepare the journal entry that should be made as of December 31, 2014, to recognize the loss.
Dr Lawsuit Loss 7,000,000 Cr Liability 7,000,000
13. Accounting for Noninterest-bearing Note (Payable in Installments) 2. What liability due to the risk of loss from lack of insurance coverage should Canyon Airlines record or disclose?
OHRID COMPANY purchased machinery on December 31, 2014, paying P80,000 down and agreeing to pay (Ignore the November 1, 2014, accident.) The company is not required to establish a liability for risk of loss from
the balance in four equal installments of P60,000 payable each December 31. Implicit in the purchase price is an lack of insurance coverage. However, the fact that the company is self-insured will require note disclosure.
assumed interest of 12%.
The following data are abstracted from the present value tables: 18. Currently Maturing Debt Expected to be Refinanced
Present value of 1 at 12% for 4 periods 0.63552 NAMEKUS COMPANY has the following three loans payable scheduled to be repaid in February of next
Present value of an ordinary annuity of 1 at 12% for 4 periods 3.03735 year. The company's accounting year ends on December 31.
Dr Machinery 262,241 Dr Discount 57,759 Cr Notes Payable 240,000 Cr Cash 80,000 a. The company intends to repay Loan 1 for P100,000 when it comes due in February. In the following October,
1. What is the cost of the machinery purchased on December 31, 2014? 262,241 the company intends to get a new loan for P80,000 from the same bank.
2. How much interest expense should be reported in Ohrid's income statement for the year ended December 31, b. The company intends to refinance Loan 2 for P150,000 when it comes due in February. The refinancing
2015? 182,241*12%=21,869 agreement, for P180,000, will be signed in April, after the financial statements for this year have been authorized
What is the carrying value of the note at December 31, 2016? 101,403 for issue.
c. The company intends to refinance Loan 3 for P200,000 before it comes due in February. The actual
14. Notes Payable refinancing, for P175,000, took place in January, before the financial statements for this year have been
On October 1, 2014, BALATON CORP. issued a P500,000, 12-month, 12% note to ABC Company in payment authorized for issue.
of account. On the same date, the company borrowed P1,000,000 from the Asian Bank by signing a 12- 1. As of December 31 of this year, the total current liabilities to be reported in the company's statement of
month, noninterest-bearing, P1,120,000 note. financial position should be 450,000
1. Prepare adjusting journal entries at December 31, 2014. 2. As of December 31 of this year, the total noncurrent liabilities to be reported in the company's statement
Oct 1 Dr Cash 440,000 Dr Discount 60,000 Cr Notes Payable 500,000 of financial position should be 0
Dec 31 Dr Interest Expense 15,000 Cr Accrued Interest 15,000
Oct 1 Dr Cash 1,000,000 Dr Discount 120,000 Cr 1,120,000 19. Short-term Loan Refinancing
Dec 31 Dr Interest Expense 30,000 Cr Discount 30,000 The following items are based on the financial statements of CARMEL COMPANY.
2. What is the total/net liability to be reported in the December 31, 2014, statement of financial position for: Current assets P 750,000
a. the interest-bearing note? 500,000 + 15,000 = 515,000 Short-term loan payable 600,000
b. the noninterest-bearing note? 1,120,000 - (120k-30k=90k) =1,030,000 Total liabilities 3,000,000
Current ratio 1.5
15. Notes Payable: Adjustments for Interest Debt-to-equity 1.5
Described below are certain transactions of TUNIS COMPANY. Carmel Company has arranged with its bank to refinance its short-term loan when it becomes due in 3 months.
1. On April 1, the corporation bought a truck for P400,000 from General Motors Company, paying The new loan will have a term of 5 years.
P40,000 in cash and signing a one-year, 12% note for the balance of the purchase price. 1. Compute the following:
a. Total current liabilities=CA/CL b. Total shareholders' equity=L/E c. Total noncurrent liabilities

Downloaded by Roselene Lanson ([email protected]) Downloaded by Roselene Lanson ([email protected])

lOMoARcPSD|34021653 lOMoARcPSD|34021653

a. 750,000/1.5=500,000 b. 3,000,000/1.5=2,000,000 c. 3,000,000-500,000=2,500,000 to recognition of income that may never be realized. A contingent asset is only disclosed when it is
2. How would you verify the validity of short-term loan refinancing? The refinancing should occur on or before the probable. However, when the realization of income is virtually certain, the related asset is no longer a
end of the reporting period. The refinancing agreement should be examined to verify that the refinancing has contingent asset and its recognition becomes appropriate.
actually taken place.

20. Debt Restructuring: Asset Swap

CAREY CO. owes P1,998,000 to Loan Shark Corp. The debt is a 10-year, 11% note. Because Carey Co. is in
financial trouble, Loan Shark Corp. agrees to accept land and cancel the entire debt. The land has a book
value of P800,000 and a fair market value of P1,200,000.
What entry should be made by Carey Co. for the debt restructure?
Dr Notes Payable 1,998,000 Cr Equipment 800,000 Cr Gain 1,198,000

21. Debt Restructuring

NAKURU CORPORATION is having financial difficulty and therefore has asked Naawa Bank to restructure its P3
million note outstanding. The present note has 3 years remaining and pays a current rate of interest of 12%. The
note was issued at its face value.
Presented below are two independent situations. Prepare the journal entry that Nakuru would make for each of
the following types of debt restructuring.
a. Naawa Bank agrees to accept land in exchange for relinquishing its claim on this note. The land has a book
value of P2,000,000 and a fair value of P2,500,000.
Dr Notes Payable 3,000,000 Cr Land 2,000,000 Cr Gain 1,000,000
b. Naawa Bank agrees to reduce the principal balance due to P2,000,000 and interest rate to 10%.
The following present value factors are abstracted from the present value tables.
Dr Old NP 3,000,000 Dr Discount 96,074 Cr New NP 2,000,000 Cr Gain 1,096,074
Present value of 1 for 3 periods 12% - 0.71178 10%-0.75132
Present value of an ordinary annuity of 1 for 3 periods 12%-2.40183 10%-2.48685
Principal 2,000,000×0.71178 = 1,423,560
Interest 200,000×2.40183 = 480,366
=1,903,926

22. Classification of Debt

A December 31, 2014, KISU COMPANY's liabilities indude the following:

1. P10 million of 10% notes are due on March 31, 2019. The financing agreement contains a covenant that
requires Kisu to maintain current assets at least equal to 200% of its current liabilities. As of December 31,
2014, Kisu has breached this loan covenant. On February 10, 2015, before Kisu's financial statements are
authorized for issue, Kisu obtained a period of grace from Mayumi Bank until January 31, 2016, having convinced
the bank that the company's normal 3 to 1 ratio of current assets to current liabilities will be reestablished during
2015. CURRENT
2. P15 million of noncancelable 12% bonds were issued at face value on September 30, 1993. The bonds mature
on August 31, 2015. Kisu expects to have sufficient cash available to redeem the bonds at maturity. CURRENT
3. P20 million of 10% bonds were issued at face value on June 30, 1995. The bonds mature on June 30, 2024,
but bondholders have the option to call (demand payment on) the bonds on June 30, 2015. However, the
call option is not expected to be exercised, given prevailing market conditions. CURRENT

What portion of Kisu Company's debt should be reported as a noncurrent liability? 0

23. Contingencies, Provisions, and Events After the Reporting Period

Your audit dient, CHALA COMPANY, is involved in the situations described below. Chala's accounting year ends
on December 31, 2014, and its financial statements are authorized for issue on March 20, 2015.
1. Chala is involved in a lawsuit resulting from a dispute with a customer. On January 28, 2015,
judgment was rendered against Chala in the amount of P20 million. Chala plans to appeal the
judgment, and is unable to predict its outcome though management believes that it will not have
a material adverse effect on the company. No adjustments
2. On April 25, 2015, the Bureau of Internal Revenue (BIR) is in the process of examining Chala's tax
returns for 2012 and 2013, but has not proposed a deficiency assessment. Management feels an
assessment is reasonably possible, and if an assessment is made, an unfavorable settlement of up to
P5 million is reasonably possible. BIR claim not yet asserted.
3. On January 5, 2015, inventory purchased FOB shipping point from a foreign country was detained at
that country's border because of political unrest. The shipment is valued at P1 million. Chala's lawyers
have stated that it is probable that Chala will be able to obtain the shipment. No Adjustment
4. On November 1, 2014, a lawsuit was filed by a disgruntled customer who discovered a safety hazard in
one of Chala's best-selling products. Chala's lawyers feel it is probable that the company will be liable
for P500,000. Dr Loss 500,000 Cr Liability 500,000 - Provision Not mere a continhent liability.
5. On December 5, 2014, Chala initiated a lawsuit seeking P1 million in damages from a patent
infringement. No adjusments. The situation involves a contingent asset because the company is the
plaintiff in the lawsuit. Under PAS 37, a contingent asset shall not be recognized because this may result

Downloaded by Roselene Lanson ([email protected]) Downloaded by Roselene Lanson ([email protected])