Contingent asset and liabil TECHNICAL KNOWLEDGEi pia i” és A provision is an existing liabili ae aed Resiesein amount 8 Hability of uncertain timing The essence of a provision is that there i bout the timing or amount of the future empend eects this uncertainty that distinguishes provision from other liabilities, The liability definitely exists at the end of reporting peri init reporting period but the amount is indefinite or the date when! tha Ouliea ig is due is also indefinite, and in some be identified or determined. Shoe Re EE Recognition of provision A provision shall be recognized as a liability in the financial statements under the following conditions: a. The entity has a present obligation, legal or constructive, as a result of a past event. b. It is probable that an outflow of resources embodying economic benefits would be required to settle the obligation c. ‘The amount of the obligation can be measured reliably. Present obligation The present obligation may be legal or constructive. A legal obligation is fairly clear. A legal obligation is an obligation arising from a contract, legislation or other operation of law. Aconstructive obligation is an obligation that is derived from an enti actions where: ‘ ; a3 st will a. The entity has indicated to other parties that it wii accept certain responsibilities by reason of an established pattern of past practice, published policy, or a sufficiently Specific current statement. i id expectation lt, the entity has created a vali expe n iis ey ubatlies parties that it will discharge those: ponsibilities. “Ab OR :Past event 2 ‘The past event that leads to a present obligation is ¢g obligating event. ‘An accounting provision cannot be created in anticipay: of a future event. 3 The event must have already occurred which gives rise tg the legal or constructive obligation. ’ i : it creates a legal An obligating event is an event tha or constructive obligation because the entity has no realistis alternative but to settle the obligation created by the event This is the case where: a. The settlement of the obligation can be enforced by law, b. The event creates valid expectations on the part of other Parties that the entity will discharge the obligation, as in the case of a constructive obligation. Probable outflow of economic benefits For a provision to qualify for recognition, there must be not only a present obligation but also a probable outflow of Tesources embodying economic benefits to settle the obligation An outflow of resources is regarded as probable if the event is more likely than not to oceur, In other words, the probability that the event will occur is greater than the probability that it will not occur, As a rule of thumb, probable means more than 50% likely or substantially more. Possible means 50% or less likely to occur, . Remote means 10% or less likely to occur or “ occurrence.be not ‘low of: le the 2 event ccur 18 kely OF slight " geliable estimate paragraph 26 of PAS 37 provides in essential part of the pre| 6 that the use of esti pars > timate is an {joes not undermine their sekablig a rea «is especially true in th Sy e case of a ‘eure, @ provision i provision. eB is more uncertain that because by naligmrent of financial position most items in the he standard suggests that by usi Mitcames, an entity usually TARE UTET of possible estimate of the obligation that is sree a hee is y reliable. Where no reliable estimate ¢ b recognized can be made, no liability ts Measurement of provision me amount recognized 05 2 provision should be the best estimate of the expenditure required to settle the present Spligation at the end of reporting period. phe best estimate is the amount that anentity to settle the obligation at the end of reporting a third party at that time would rationally period or pay to transfer it to Where a single obligation is being measured, the individual most likely outcome adjusted for ‘the effect of other possible Frfsomes may be the best estimate outcomes vontinuous range of possible other, the Where there is 2 ¢ Padieach point in that tape is as likely a8 ANY midpoint of the range © used. Where the provision bein! population of items, all possible outcomes PY hod of estimation is nge The name for this © "expected value".ainst the entity and in favor « the court rules again that there is a 30% ant, the lawyers believ® tar ages of P4,000,000 g entity will be required to pay da Fo hance that the damages will be P2,000,000. is i j t factor to the probabilities of { ‘A 10% risk adjustment fo the ee expected cash flows is considere uncertainties in the cash flow estimate. Measurement of provi: Weighted probabilities: 30% x 4,000,000 x 60% 70% x 2,000,000 x 60% Expected cash outflow Risk adjustment factor (10% x 1,560,000) Estimated amount of provision The weighted probability is multiplied by 60% bi ‘4 is a 60% chance that the court will not dicmice theacoen, ‘The/amount of the provision shall be disco: - of the tinie value of money is material. nee Che elect Other measurement considerations The following items are taken int i s 3 A ‘0 consi i i recognizing and measuring a provision: ~ deration in Risks and uncertainties Present value of obligation Future events Expected disposal of assets Reimbursements i . Changes in provision 7. Use of provision : operating losseson iD iske and uncertainties qhe risks and uncertainti and _circumstanc ‘ainties that " Rae ostiracts of a perv ‘taken fies surround event jon. swt account in reaching Risk describes variability of outco: y me. ‘A risk adjustment may i a pility 18 theosured, ene the arwolintat whack which a ‘As prudence dictates Pe ey ca citionl of unseriantyreg nite ertainty in making judgment not overstated, or expenses Bat eps a ‘and Bian np are not understated. present value of obligation Where the effect of the ti t of the time value of money Baers of provision shall be the preneat cee ae expenditure expected to settle the obligation, gees count rate should be a pretax rate that reflects the The dis t of the time value of money. current market assessmen' Future events hat affect the amount required to settle an. reflected in the amount of a provision ¢t evidence that they will occur. Future events t obligation shall be _ where there is a sufficien Such future events include new legislation and changes in technology isposal of asset Expected d f asset shall not b disposal o e taken into Gain from expected g a provision. account in measurin ize gain on dS Instead, an entity time of the disposition of the asset. * Tnother words, any cash inflows from i “separately from the easurement of the P iS 83 ayf the expenditure required to settle, 1 ot ite rermbursed by another party, ‘s ‘ d when it ie Uh ii ent shall be recognize: 1 i thie Feimbursement Piircement would be received if the eny settles the obligation. The amount of reimbursew of the provision. ted as a separate asset ang The reimbursement shall be treal ; not netted against the estimated liability for the provision, in the income statement, the expense relating to be presented nef of the reimbursement, Where some or al provision is-expect nent shall not exceed the amount However, the provision may Changes in provision Provisions shall be reviewed ‘at every end of the reporting period and adjusted to reflect the current best estimate Use of provision A provision shall be used only for expenditures for which the provision was originally recognized. Future operating losses Provision shall not be recognized for future operating losses because a past event creating a present obligation has not occurred. Onerous contract If an entity has an onerous contract, the present obligation under the contract shall be recognized and measured as ‘a provision An onerous contract is a contract in which the unavoidable ‘costs of meeting the obligation under the contract exceed the economic benefits expected to be received under it. ‘The unavoidable costs under a contract represent the lea net cost of exiting from the contract. seca mount between the cost of fulfilling ¢ ation or penal arising from cost The lower a exiting from .d the compens: the contract is the leastfs ites fs st estim: * recognized as a stimate of the re oe ctive obliga geo ion because the nty hich is the sale of the mee from ae there is clear , he product with war eating event ,. Environmental contamina anty. environmental policy Bee - expect the entity to clea entity has broken curre: a provision for environ: Tf an entit: that other “saat has an ny parties would P any contamination, or if the ‘nt environment: i is al legisl mental damage shell bs made, fies eblientes eve nt is the contamination of the properts se to constructive or legal abligation. A provision is recognized for : Dering Up tee conten Ge Decommissioning or abandonm entity initially purchases an oil field, it Sra cates Jegal obligation to decommission cho aiaatneee of its life. The cost of abandonment or decommissioning shall pe recognized as a provision and may be capitalized as cost of the oil field . Court case — After a wedding in the current year, ten people died possibly as a result of food poisoning from products sold by the entity. Legal proceedings are started seeking damages from the entity. When the entity prepares the financial statements for the current year, the Jawyers advise that owing to the developments in the case, it is probable that the entity would be found liable. A provision & recognized for the best estimate of the damages because there is a present obligation. an entity gives @ ther entity. During f the borrower er files a petition e — In the current year, Guarantee y ings of ano guarantee of certain borrow) of 2 the year, ‘the financial condition deteriorates and at year-end, the for bankruptcy. aa ig 43 Bay hf ized for the best es! ‘ A provision is recosniz6 st et i ligation Led there is leet tl fhe obligating ev th i 85Restructuring sph 10, defines restructuring as 4 p PAS 97, Perirontrolled by management Gnd matey planned over the acope of & Business of 2% enlity mai qualify as yestructuring include; Events that may ination of a line of business a. Sale or termi ; . b. Closure of business location in a region or relocation gf ym one location to another iness activities fro’ felocation of headquarters from one country to anothe Change in management structure, such as elimination of a layer of management or making all functional units autonomous. . Fundamental reorganization of an entity that has a material and significant impact on its operations. Provision for restructuring Recognition of the provision for restructuring is required because a constructive obligation may arise from the decision to restructure. A constructive obligation for restructuring arises when two conditions are present: 1 The entity has a detailed formal plan for th restructurin, which includes the following: ue a. The business being restructured, b. The principal location affected B i their employment, d. Date when the plan will be impl e. The expenditures that will be inde The entity has raised valid expectation in che ..: those affected that the entity will Tage pe ce restructuring by starting to implement thes laa a announcing the main features to those aft m 3“pilustration ighe board of directors of e current year~ an entit {hernational Greene decided’ te “yet meeting held at imd consolidate the 8 and shift ite interserige Owe th its m with ite domestic ops rane ‘a detailed formal plan for wi erations, i in operations was also formalized ding up the international and agreed by the board of e sation directors in that meeti othet ting, > anal othe” Letters were sent a er, z out to customer: daa thereafter. Mectings were customers, suppliere, workers ma] aot the formal plan to wind up int. 1 discuss the features of unigg fepresentatives of all interest srnalinne) Oe eae those meetings. ed parties were present in tat h a unt of res f ot ee Amount of restructuring provision A restructuring provision shall Rtas . include only direct expenditures arising from the restructuring. requis ai eee es are necessarily pe in connection with restructuring and not associated wit he ‘ decisifi oka enlity with the ongoing activities For example, salaries and benefits of employees 10 bt aeed ‘hen two after operations cease and that are associated with the closure tf the operations shall be included in the amount of the ; restructuring provision ucturing The following © senditures are specifically excluded from the restructuring provision: a, Cost of retraining or relocating continuing staff. mber of b. Marketing or advertising program to promote the new inating |. company image ¢. Investment in new system and distribution network. wally disallowed as are cate orically disal cee : ‘tures relate to Such expenditure visions because the expendi and thus are inds of restructuring Pr Fe oie the the future conduct of the busine ve and hot liabilities relating to *° oD by it- 87Contingent liability , ; 27, paragraph 10, defines a contingent liability: PAS 37, pai , pe a ee A contingent liability is a possible obligation that a1 a ni past event and whose exist idea the occurrence or nonoccurren MORE ines ities ‘events not wholly within the control entity, : tence will be confirmed only p ence of one Or more uncer, ai resent obligation that arises A contingent liability is a pre: e it is no! probabl, i beca' ast event but is not recognized becat 1 that an outflow of resources embodying economic benefits will be required to settle the obligation or the amount of tha 7 obligation cannot be measured reliably. Contingent liability and provision The second definition states that a contingent liability is a present obligation. However, the present obligation is either probable or measurable but not both to be considered a contingent liability. If the present obligation is probable and the amount can be measured reliably, the obligation is not a contingent liability but shall be recognized as a provision. Treatment of contingent liability A contingent liability shall not be recognized in the financial statements but shall be disclosed only. The required disclosures are: a. Brief description of the nature of the contingent liability. b. An estimate of its financial effects, c. An indication of the uncertainties that exist. d. Possibility of any reimbursement, Ifa contingent liability is remote, no disclos Beontingent asset A contingent asset is nd Ww 8 poss eyent and whose exieener wil te gt fin f eee ene WHOS sence Of One oF more ne only By within the control of the meer 1 entity, ‘A contingent asset shall gnized because this may yesult to recognition of j Seg F Peeks wheb ty of ineome that may never be touts ; e rei 2rops the related asset is alization of income is virtual ate Reef resem 5 appear" AREER ae peti wory® A contingent as: the sset is only disclosed when it is probs The disclosure includes a brief a eee een oh catnanete lescripti ; = and an estimate of its financialetlects nem Jf a contingent asset is o: ‘i we See is only possible or remote, no disclosure Ba Decommissioning liability dle oF A decommissioning liability is an obligation to dismantle, nel femove and restore an item of property, plant and equipment as required by law or contract, & decommissioning liability is also called asset retirement obligation. ia be Illustration ility On January 1, 2024, an entity engaged in extracting natural gas and oil constructed a drilling platform for P25,000,000 fnd is required by Philippine law to remove and dismantle the platform at the end of its useful life of 10 years. acial The straight line method is used in depreciating the drilling ired platform The entity had es imated that such decommissioning St # cost P5,000,000. Based on a 12% discount rate, the P) lity value of 1 for 10 years is 0.822. issioning liability 38 Thus, the present value of the decomm™ 5,000,000 times 0.322 or P1,610,000. : ‘Vicasias v5 ae The decommissioning liability is inal oe - present value and included in the cost 0 8926,610,000 a ' $eRmissoning Habiity 2,661,000 Depreciation ‘ Des, St DePocumulated depreciation (26,610,000/ 10 years) 193,200 31 Interest expense Decommissioning liability (42% x 1,610,000) ao 2,661,000 Dee. 31 Depreciation Accumulated depreciation 31. Interestexpense 216,384 Decommissioning liability 216,384 Decommissioning liability January 1, 2024 1,610,000 Interest expense for 2024 Carryitig amount—Decerber 31, 2024 expense for 2025 (12% x 1,803,200) Settlement of decommissioning liability On Decembe: 2033, after 10 years, the entity contracted with another entity to dismantle and remove the drilling platform for P5,500,000. The settlement of th ie liability is normally recorded as payment of | aoe Decommissioning liability 5 Loss on settlement of liability Eh Cash i 5,500,000 On January 1, 2024, the decommi hi : P1,610,000. This amount plus 12% Faia a Uy . annually will build up to P5,000,000 after 10 pomted December 31, 2033. Thus, the decommissioning eae on debited at P5,000,000. The carrying amount of the qty, © - platform is derecognized on December 3 © drilling Acclimulated depreciation Drilling platformOnJanuary 1, 2024, the pla i GGThe cost of the plant was Pia ene po gepany 8 000, a depreciation of P4,000,000. ate The plant had a useful life of 3 Fae Oi ctrsigh Ene eho cote and wae deprecated Because of the unwinding discount of : i we 6% Se are, nt ol over 10 years, the seeming tity bad evn rom PLO) 0. 79500 However, the entity had estimat ; Beraslogical advances the ‘qeesont velce caw decommissioning liability had decreased by P800,000. i 2024 Jan. 1 Decommissioning liability 800,000 Plant asset . 800,000 Dec. 31 Deepreciation 360,000 ‘Accumulated depreciation 360,000 12,000,000 ( Cost of plant 800,000) Reduction of decommissioning liability Net cost, 11,200,000 Accumulated depreciation (4,000,000) 7,200,000, Carrying amount 200,000/20 years) 360,000 59,400 Depreciation for 2024 (7, 81 Interest expense aay Decommissioning liability issi ili 790,000 Decommissioning liability - January 1,2024 1,790, Reduction 300,000) | Aajusted carrying amount January 1.2024 990,000 ense for 2024 (6% x:990,000)_ ‘ Interest exp!QUESTIONS 1, Explain a provision. 2.What are the three conditions necessary for gy recognition a provision as a liability Explain a legal obligation Explain a constructive obligation . Explain an obligating event Explain the terms probable, possible and remote in relation to a provision . Explain the measurement of a provision. Explain a ructuring provision. Define a contingent liability. Distinguish a contingent liability from a provision. . Explain the treatment of a contingent liability. Define a contingent asset. Explain the treatment of a contingent asset. Define a decommissioning liability, Explain the treatment of a decommissioning liabilityentity is defending against a first laweuit "there a are chance it peribvehgteg cette ated the damages from, the lawsuit at P1,000,000._ ‘The entity is defending against which tanagement believed iis virtually certain ta lose mn eouet Tf it loses the lawsuit, mana i gk : a igement estimatec pe 000 vith oak in the range of 3 ean 000 to 000,000 with each amount in th: yqually li 5,000. at range equally likely ‘The entity is defending against a third lawsuit but the relevant loss will only occur far into the future. The present values of the endpoints of the range are vision, P1,500,000 and P2,500,000. ty. ‘The management believed the effects of time value of money on these amounts are material but also believed the timing of these amounts is uncertain. * The entity is defending against a fourth lawsuit and believed there is only a 25% chance it will lose in court. If the entity loses, management believed damages will fall somewhere in the range of P3,000,000 to ‘P4,000,000 with each amount in that range equally likely to occur. iability. Required: Indicate how the entity would disclose oz account for the " four lawsuits under IFRS in the financial statements for ee 4 oa ar ended December 31, 2024.ided the following og Pees related Prontingencies. The fiscal yegp transactions relat on December 81, 21 ‘on March 31, 2025. * Bourne Company is inv fa dispute with a customer ove! On December 31, 2024, attorneys advised that it was probable that Bourne Company would lose P3,000,000 a an unfavorable outcome. On February 15, 2025, judgment was rendered against Bourne Company in the amount f P4,000,000 plus interest 500,000. Bourne Company did not plan to appeal the judgment. 24 and financial statements are iggy olved in a lawsuit resulting x a 2024 transaction, Bourne Company is the defendant in a lawsuit filed in January 2025 in which the plaintiff seeks P5,000,000 as an adjustment to the purchase price related to the sale of Bourne Company's hardwood division in 2024. The lawsuit alleged that Bourne Company misrepresented the division's assets and liabilities. Legal counsel advised that it is reasonably possible that Bourne Company could lose P2,000,000 but that it is extremely unlikely it could lose the P5,000,000 asked for. On March 1, 2025, the provincial government is in the process of investigating the possibility of environmental violation by Bourne Company but has not proposed a penalty assessment. ‘ Management believed an assessment is reasonably possible and if an assessment is made, a settlement of up to P4,000,000 is probable. s Required: ‘a Prepare journal entries on December 31, 2024 as. the contingencies. et SieaaComp ee Bony Provided the following + In May 2024, astern tigation. I Compa : fudement BETO bona tee eee Savalyed tn entity is appealing the amount spate Compaapeine ig The attorneys believed it is the judgment. can be réduced on ay Probable that tho a¢ Cat do at least @ yen at PY 50%. The appeal is expected * In July 2024, Pasig Cit; Gompany for polluting | products. brought action agai ion against Baste the Pasig River with its waste eee Be aretha will be successful but the Bot exceed PLSOG.0U0 oe ee + Basterm Company signed’as 1 as guarantor f lita by First Bank to Norilen Conpery: aarneeel supplier to Eastern Company. een At this time, there is a only a remote lik z ya elihood that Es Company will have to make payment on behalf of Neon Company. Eastern Company owned a manufacturing site that had now been discovered to be contaminated with toxic waste. The entity had acknowledged its responsibility for the contamination. ‘An initial clean up feasibility study has shown that it will cost at least P500,000 to clean up the toxic waste. d for patent infringement Eastern Company had been sue judgment of P300,000 was and lost the case. A prelimin: issued and is under appeal. The entity's attorneys believed that entity will lose this appeal. it is probable that the ' Required: Prepare journal entries to recognize any provision on December 31, 2024. 95Problem 4-4 (IAA) Western Company provided the following selectey transactions related to contingencies. al : “i ape FP th The fiscal year ends December 31, 2024. Financial statement, emnantle are issued on April 1, 2025 wank? Pee are Wil * In December 2024, Western Company became aware of Be 4 an engineering flaw in a product that poses a potential © wis pee y risk of injury. gre deP or giscount, 0 ‘As a result, a product recall appears inevitable. This periods 35 move would likely cost the entity P1,500,000. a Decem® * In November 2024, the City of Manila filed suit against the entity I Western Company asking civil penalties and injunctive price relief for violations of clean water laws. 4 < equire Western Company reached a settlement with the city og government authorites to pay P4,200,000 in penalties on pe wrepar February 15, 2025. 9. Prepal * Western Company is the plaintiff in a P4,000,000 lawsuit Problen filed against a customer for costs and lost profit from contracts rejected in 2024 On Janu: site that The lawsuit is in final appeal and attorneys advised that when th: it is probable that Western Company will be awarded The cost 3,000,000. cost is ¢ _ mine wi Required: Prepare the appropriate journal entries on December 31, 9024 as a result of each of the contingencies. If no journal enitry is indicated, state the reason why.t ape Sain, puns ny Unctine the ej alties op lawsuit fit from ed that warded It is reliably estimated that th Peiacrats: a ase whee con coe. decommissioning ate is 10% 500,000. ‘The a periods is 0.62. present value of 1 at 10% for 6 On December 31, 2028, afte : , 2028, after 5 years the entity paid 2 demolition Ree operating the depot, a price of P1,700,000. lismantle the depot at Required: 1, Prepare journal entries for 2024. 3. Prepare journal entries on December 31, 2028. Problem 4-6 (IAA) ary 1, 2024, Stanford C y eens 024, Stanford Company purchased a mining site tha’ nave to he restored to certain specifications when the mining production ceases mining site is P8,000,000 and the restoration P2,000,000. It is estimated that the ration for 10 years. ‘The cost of the cost is expected to be mine will continue in ope! tiscount rate is 8%. The present value of 1 The appropriate ¢ at 8% for 10 periods is 0.4632. 3. the entity contra’ the mining site in ace ,000. cted with another On December 31 entity for the res ordance with specification oration of 5 at a cost of P1,800 Required: 1. Prepare journal entr 2 Prepare journal entr decommissioning liab: 1, 2024, Camille Company Aaahe ns facility for P9,000,000. i i ntamination cost of cleaning up the routine contaminatio he a ial location of gas on the property is estim, the 1,500,000. ‘This cost will be incurred in 10 years when all of the stockpile of gas is detoxified and the facil decommissioned. Additional contamination may occur in succeeding yearg h the facili On January 1, 2026, additional contamination clean up cost is estimated at P200,000 The appropriaic discount rate is 6% {he Present value of 1 at 6% is 0.63 for 8 periods and 0.56 for | 10 periods. 4 On December 31, 2033, the entity , Y paid a contractor an amount of P2,000,000 for the decommi i missi detoxification facility. oe ae Required: 1. Prepare journal entries, in 2094 ; a 24 i i detoxification facility and the decommission, ten € liabil o 2, Prepare journal entries in 2096 ; z detonifction facility and decommianional® epito sha ‘ability. % Prepare journal entries on December 3 ne derecognition of the detoxification p 2083 &0.lity i "208 thay up Cost 1.56 for servicing cars car di ts gervicing cars under warranty Merehip ~ In preparing thi te Seats the] Sey statements, : SE ene po ision for warranty that it pense top se end of the rant that it would be aqui ‘The entity's experience with warrant ‘anty claims is: 60% of all cars sold in a 9 year hay gold in.a year have normal defect, ang eet 25% of all cars a year have significant defect," 1°” ofall cars sold in ‘The cost of rectifying a non {a normal de cost of rectifying a significant defect nn oe 710,000, The ),000. The entity sold 500 cars during the year What amount should be reportes Bi riuty privicioa for the cent ya ae a. 3,500,000 b. 1,750,000 c. 1,400,000 d. 4,000,000 Problem 4-9 (IFRS) Chato Compar ectrical goods covered by a one-year warranty fo! Of the sales of P70,000,000 that 3% will have major and 92% will have no defect. would be and P3,00! or the year, the entity estimated fect, 5% will have minor defect 5,000,000 if all the ‘products 0,000 if all had minor defect. s warranty provision? The cost of repai sold had major defect What amount should be recognized a: a. 8,000,000 b. 5,600,000 300,0002024, Odyssey Company is the defendant ment lawsuit. outflow of economic benefits. However, if the court rules in favor of the claimant lawyers believed that there is a 20% chance that the en will be required to pay damages of P200,000 and an chance that the entity will be required to pay damage P100,000. Other outcomes are unlikely. ‘The court is expected to rule in late December 2025, There is no indication that the claimant will settle out of court; A 7% risk adjustment factor to the probability-weighted expected cash flows is considered appropriate to reflect the uncertainties in the cash flow estimates. An appropriate discount rate is 5% per year. The present — value of 1 at 5% for one period is 0.95. 1. What amount should be recognized as undiscounted eash flows for the provision? a. 200,000 b. 100,000 c. 150,000 d. 89,880 What amount should be reported as provision for lawsuit on December 31, 2024? i 2 Te ale, a. 95,000puring 2024, Libya patent lawsuit. phe lawyers believed there j, will not dismiss the case maui” 80% : benefits. case and the cata aoe ee outflow of. If the court rules in fa peered that there is a 60% chan eat % chance ae aN ere of P2,000,000 and we er eRe a a 40% chance that Other amounts of damages are unlikely et | 10001000- y. Salant the lawyers ‘at the entity will be There is no indication tha at the clai court. The court is expected to rule Tana om er 2025 A 7% risk adjustment factor ‘actor to the cash flows i appropriate to reflect the uncertainties Im the cook fing estimates. One The appropriate discount rate is 10%. The PV of 1 at 10% fc one period is .91 OE, What amount should be recognized as undiscounted cash 1 flows for the provision? a. 1,369,600 b. 1,280,000 ¢, 1,600,000 d. 1,712,000 ion for lawsuit . What amount should be reported as provisic on December 31, 2024? a. 2,730,000 b. 1,456,000 ©. 1,246,336 d. 1,164,800ay i consulted with an attorney and deter ee ee may lose the case. The attorney eat that there is a 50% chance of losing. If this is the case, the attorney estimated that the amo any payment would be P5,000,000. % What is the-required journal entry as a result of th litigation? a. Debit litigation expense and credit litigation liability 5,000,000. b. No journal entry is required. : ¢. Debit litigation expense and credit litigation liability P2,000,000, d. Debit litigation expense and credit litigation liability P3,000,000. Problem 4-13 (AICPA Adapted) On November 5, 2024, a Dunn Company truck was in an accident with an auto driven by Bell. Dunn Company received Rotice on January 15, 2026 ofa lawsuit for P7000. damages for personal injuiries suffered by Bell. : The entity's counsel believed it is probable that Bell will be awarded an estimated amount in the range between P200,000 00, and ‘ statements were issued on March 1, 2025, What amount of loss should be accrued on December 31, 20247 a, 450,000 j b. 200,000 c. 825,000414 (AICPA Adaptea) ‘puring 2024, Manfred 700,000 loan from a sabres tober 1, 202: | sae Ribdcr as ies oh as notified that the supplier Counsel believed the entity will ete bankruptcy protection. under its guarantee. ly have to pay P250,000 'Pany guaranteed a supplier's ‘gsa result of the supplier's banker iptcy, the entity A eontract in December 2024 to retoa ity entered into P 1 a entity could accept parts from other ee eee aed fre estimated to be P300,000. ippliers. Refooling costa What amount should be 3 Wher sber 31, 2024? e reported as accrued liability on a. 250,000 pb, 450,000 cc. 550,000 d. 750,000 Problem 4-15 (AICPA Adapted) al Company became involved in a tax dispute trith the BIR. On December 31, 2024, the entity's tax advise fufjaved that an unfavorable outcome was probable and the besi estimate of additional tax was 500,000 but could be as. much as P650,000. During 2024, Be ements were issued, the entity After the 2024 financial ste fer of P550,000. Teceived and accepted a BIR settlement 0 What amount of accrued liability should be reported on December 31, 2024? a, 650,000 b. 550,000 ec. 500,000 a._ Problem 4-16’ (AICPA Adapted) employee filed a P2,000,009 = fagsueeel Company. tor damages suffered when Gf the entity exploded on December 29, 2024. ity's’legal counsel believed the entity’ will proba Tose the woul abd estimated the Toss to be Pb00 bogey lawsuit out of qT loyee has offered to settle the in Ge POO Woo ken entity will not agree to the settlement j in December 31, 2024, what amount should be reporteq Pe, ecrued liability? what ? a. 2,000,000 Al b. 1,000,000 on c. '900,000 a d. 500,000 A ad) Problem 4-17 (AICPA Adapted) oN Qn November 25, 2024 an explosion occurred at a Rex ad ‘ompany plant causing extensive property damage to area aN buildings. By March 10, 2025, claims had been asserted Pi against Rex Company The management and counsel concluded that it is probable Prot Rex Company will be responsible for damages, dad dot Me P3,500,000 would be a reasonable estimate of ting liability. in 2 seel j ex Company had 2 10,000,000 comprehensive public ability policy with P500,000 deductible clause ‘The financial Aco 8 ts for 2024 were issued on March 25, 2095, PLE vert 1. What amount of los from lawsuit should be reported atement for 2024? in the income s a. 3,500,000 b. 3,000,000 c. 500,000 d. 0 to What amount of liability from lawsuit should be reported on December 31, 2024? a. 3,500,000 b. 1,750,000 ce. 1,500,000 d. 750,0007a Re: x to area sserted vobable: id that bility. public iancial ported wh ter Company is bei: dents asa result of seat’ fF illness stting the local reside ence on. : 0 _pormireals from its plant ot? % cma Se 2 toxic Sorel : ie ens Ine sae Opa tt i ey writy anywhere from P1,209 ee idenibae Cee jawyer estimated that the mo P6,000,000. Hows proba is eo oeree, th is P3,600,000, What amount should be accrued and discl losed? _ A loss contingene: : gency of PI 3 pdditional contingency of uj tee acogi Te ox lous contingency of Paecn Gon tat additional contingoney of up to P2,400,000 disclose an . A loss contingency of P3,6 ener 00,000 but not disclose any | No loss contingency but 4 ee isclose a contingency of Problem 4-19 (AICPA Adapted) InMay 2024, Caso Company filed suit against Wayne Company seeking 1,900,000 damages for patent infringement ‘A court verdict in November 2024 awarded Caso Company Wayne Company appealed. the P1,500,000 in damages but fendict and the appeal is not expected to be decided before 2025. ‘The legal counsel believed it is probable that Caso Company will be successful against Wayne Company for an estimated amount in the range between. 800,000 and P1,100,000, with P1,000,000 considered the most likely amount. What amount should Caso Company record as aie from the lawsuit for the year ended December 31, 2024? a, 1,500,000Durii 24, Smith Company filed suit agai Ca Raty seeking damages for patent infringem December 31, 2024, the legal counsel believed that probable that Smith Company would be successful West Company for an estimated amount of P1,500,099, : On March 31, 2025, Smith Company was awarded P1,000,9,) and received full payment thereof. The financial statemeng, were issued March 1, 2025. In Smith Company's 2024 finania statements, how should this award be reported? “i a. Asa receivable and revenue of P1,000,000. b. As a receivable and deferred revenue of P1,000,000, ¢. Asa disclosure of a contingent asset of P1,000,000. d. As a disclosure of a contingent asset of P1,500,000. Problem 4-21 (AICPA Adapted) Tone Company was the defendant in a lawsuit filed by Witt Company in 2023 disputing the validity of copyright held by Tone Company. On December 31, 2023, Tone Company determined that Witt Company would probably be successful for an estimated amount of P400,000. Appropriately, a P400,000 loss was accrued by Tone Company by a charge to income for the year ended December 31, 2023, On December 81, 2024, Tone Company and Witt Company agreed to a settlement providing for cash payment of P250,000 by Tone Company to Witt Company and transfer of Tone Company's copyright to Witt Company. ‘The carrying amount of the copyright of Tone Company was P50,000 on December 31, 2024. | What would be the effect of the settlement on Tone Company's income before tax in 2024? a. 150,000 increase b, 150,000 decrease c. 100,000 increase d. 100,000 decreaseising from > A liability which cannot hook Past events Seria, ‘anot or uncertain 4, An obligation to transfor ene, metered mn entity 2.A provision shall be recognized whe when a. Anentityhasa present obli a deca Sa wie b: Tes prcale, thet an oti of emu et O¢. Theamount of nea cede the oblightion: on ca @, All of these are required for the measured reliably. provision liability. recognition of & 3, A legal obligation is an obli rine following, except igation that is derived from all b. A contract @. Other operation of law 4, An established pattern of practice ed pattern of practice or stated has created valid expectation that it wall ancial responsibility. 4, Anentity has an e stablishi Constructive obligation Legal obligation Onerous obligation | Possible obligation r constructive eates a legal 0 other realistic entity has no he obligation. 6.1t is an event that or obligation because the alternative but to settle t a. Obligating event _ b. Past event ‘¢, Subsequent event Current eventhr embodying economic bg, Aa avied as probable when Ca hat the event will occur jg , ility thal a ; Bi Re probebiity that the event will not g ‘The probability that the event will not occur ig ¢ "than the probability that the event will occur The probability that the event wi occur is the g as the probability that the event will not occup. |. The probability that the event will occur is 90% ig) i ible outcome 7. Where there is a continuous range of possil and each point in that range is as likely as any other, hy range to be used is the a. Minimum b. Maximum ¢. Midpoint d. Summation of the minimum and maximum 8. When the provision involves a large population of items, the estimate of the amount a. Reflects the weighting of all possible outcomes by their associated probabilities b. Is determined as the individual most likely outcome, ©. May be the individual most likely outcome adjusted for the effect of other possible outcomes, d. Midpoint of the possible outcomes. 9. When the provision arises from a single obligation, the estimate of the amount a. Reflects the weighting of all possible outcomes by their associated probabilities, b. Is determined as the individual most likely outcome, c. Is the individual most likely outcome adjusted fee rig effect of other possible outcomes, d. Midpoint of the possible outcomes, 10. The present value in a range cf possible outcomes all discounted using the same rate would be a. The most-likely outcome b. The maximum outcome i inimum outcome d The Sa of probability-weighted present_A provision shall be recognized f nized for a. Future operating 1 f. Obligations under incur Reductions in fair value a. Obligations for plant de (of financial instruments ee 2, Provisions shall be recogni Recent cognized for all of the following, Cleaning-up costs 4 of contam: entit! ‘inated Jand i a y has a published policy that it will nee aes cae up all contamination that it cau: Ree: structuring costs after a bi ee x a binding sal . “Rectification costs relating to ee ee | Future refurbishment costs due to introduction of new computer system. ete 4, An entity is closing oné of its operating divisions, and the conditions for making restructuring provision have heen met. The closure will happen in the first quarter of the next financial year. ar-end, the entity has announced the At the current icly and is calculating the restructuring formal plan publ provision. Which of the following costs should be ineluded in the restructuring provision? a, Retraining staff continuing to be employed Relocation costs relating to staff moving to other divisions Contractually re! made redundant |. Future operating lo up to the date of closure tiring staff being g closed being closed. sts of rel division bein e division quired co! from the gses of th 109re e ved a legal notice at ye, ae ae tadnt of Environment and Natira to fit smoke detectors in its factory on or of the next year. The cost of fitting smoke det be measured reliably. 2 How should the entity treat this in the financig) statements at year-end? 4 a. Recognize a provision for the current year equal ty the estimated amount. b. Recognize a provision for the current year equal tp one-half only of the mated amount. No provision is recognized at year-end because there is no present obligation for the future expenditure since the entity can avoid the future expenditure by changing the method of operations, but disclosure is required. d. Ignore the event. 5. An entity operates chemical plants. The published Policies include a commitment to making good any damage caused to the environment by its operations, The entity has always’ honored this commitment, Which of the following scenarios relating to the entity would give rise to a provision? a. On past experience it is likely that a chemical spill which would result in ‘having to pay fines and penalties will occur in the next year, Recent research suggests there is a possibility that the entity's actions may damage surrounding wildlife. The government has outlined plans for a new law requiring all environmental damage to be rectified. . A chemical spill from one of the entity's plants has , caused harm to the surrounding area and wildlife. "pele Multiple choice ‘ice, i An entity, did. not record an ace ‘A Adapted) the range of the et Sane ature ofthe oth a present iS Remote ly is the loss? sae b. Reasonabl ‘ pansia Pree d. Certain 9, The likelihood that the fu © future event will or wi will not occur can be expressed b; yy a range fheans that the future event es SNE hae 8 very slight? a. aad , Reasonably pos een ee a Remote 3, An expropriation of asset wh asset which is imminent Be ciount of loos cai be renayieing Cae arta be a. Accrued b. Disclosed ¢: Accrued and disclosed d. Ignored ation that is probable and for which the 4,A present oblig: liably estimated should amount can be rel a. Not be accrued but disclosed in the notes t financial statements. Be accrued by debiting an appropriated retained earnings account and crediting a liability account. Go accrued by debiting an expense account ani pe diting an appropriated retained earning” account. Be accrued by debiting an expense ‘account and crediting a liability account. ‘0 the 6.General or unspecified contingencies should sed. statements and disclos not be disclosed. be disclosed. d not be disclosed. d in the financial nd need ut should a. Be accrue b. Not be accrued @ ¢. Not be accrued b ~ d. Be accrued but nee iitae 6. A contingent liability : r a. Has a most probable value of zero but may yo "payment if a given future event occurs. b. Definitely exists as a liability. c. Is reported as current liability. d. Is not disclosed in the financial statements, 7. Contingent asset is usually recognized when a. Realized b. Occurrence is reasonably possible and the amount ean be reliably measured ¢. Occurrence is probable and measurable d. The amount can be reliably measured 8. Which is the proper treatment of contingent asset? a. An accrued account b. Deferred income ¢. An account receivable d. A disclosure only 9. Gain contingency that is remote and measurable a. Must be disclosed in a note to financial statements. b. May be disclosed in a note to financial statements. Must be reported in the body of the financial statements. d. Should not be reported or disclosed. ch 10. Which is the proper way to report a contingent asset, receipt of which is virtually certain? a. As an asset b. As unearned evenue c. As a disclosure only d. No disclosure and no accruala. Whether probable b. The degree of vino measurable, ¢. The present condition" G. The outcome of a future event. . A contingent liability shall be: “recognized when Any lawsuit is actually filed against an entity. It is certain that fun é of the claim, "ds 8 available to pay the amount It is probable that a liabili abil 4 amount cannot ie Biase incurred but the |. The amount of the loss can b \ is probable prior to issuniics of Seamer aaa a liability has been incurred See ee How should a contingent liabilit i . a y be reporte: st statements when it is reasonably oe eee a, As a deferred liability b. As an accrued liability c. As a disclosure only d. As an account payable . A contingent liability a. Definitely exists as a liability but the amount and due date are indeterminable. b. Is accrued even though not reason: c. Is the result of a loss contingency. d. Is not recognized in the financial statements. ably estimated. . A contngent liability is iability. eau 6 * aut, ae is om recognized ecaice) it is nat probable that an outflow will be yequired or the amo} cannot be reliably estimated. A potential large liability. potential small liability. 113,