Assignment

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 because
of lawsuit.
ANSWER: Contingent Liability because the percentage of occurrence of liability
is below 50%. It is not advisable to recognize it as liability and write down in the
book, because there is no obligation in the past event, that is why it should be
disclosed as contingent liability.

2. In September 2020, Garrison Company became involved in lawsuit. As a result

of litigation, it is more likely than not the Garrison will have to pay an amount
ranging from 700,000 to 1,000,000 but 800,000 is considered the best estimate.
ANWER: Provision is recognized because it stated the best estimate of the
liability. And the estimate amount is more likely outcome which is P800,000.

Journal Entry: Estimated loss from lawsuit P800,000

Provision from pending lawsuit P800,000

3. In the latter part of December 2020, Dallas Company’s vehicle was involved in a
collision with a truck of Kansas Corporation. In January 2021, Kansas filed a
lawsuit against Dallas for damages to the vehicle. Based on the police incident
report, it is probable that estimated damages between 300,000 and 500,000 will
be incurred by Dallas. Each point within the range of amounts is considered as
likely as any other point. Dallas issued its 2020 financial statements in March
2021.
ANSWER: Provision is recognized for the estimated amount of the costs of
damages which is P400,000

Journal Entry: Loss from accident P400,000

Provision for damages P400,000

4. In the latter part of December 2020, Dallas Company’s vehicle was involved in a
collision with a truck of Kansas Corporation. In January 2021, Kansas filed a
lawsuit against Dallas for damages to the vehicle. Based on the police incident
report, it is probable at December 21, 2020 that estimated damages between
300,000 and 500,000 will be incurred by Dallas. In February 2021, Kansas
accepted Dallas offer of 350,000 from reimbursement of damages of its car.
Dallas issued its 2020 financial statement on March 2021.
ANSWER: Accrued Expense because the amount of reimbursement for
damages are certain which is P350,000 and also the date of payment was
certain. It is also probable so that it is accrued expense.
Journal Entry: Accrued Liability P350,000
Cash P350,000
5. During 2020, Going Steady Company sold that offer product warranties against
defects. Based on the entity’s industry experience, it is estimated that 60% of the
products sold have no defects, 30% have minor defects and 10% have major
defects. Estimated warranty cost were 1,000,000 if all products sold have major
defects and 200,000 if all products sold have minor defects. Going steady has
already incurred 60,000 of warranty cost relating to appliances sold during 2020.
ANSWER: Provision because it is probable that the sale of defective
merchandise will result in an outflow of economic benefits. The best estimate of
the obligation is the expected value of the outcome.

No defects P0x60% = P0
Minor defects 200,000x30% = 60,000
Major defects 1.000,000x 10% = 100,000
Amount of Provision P160,000
Incurred of warranty cost (60,000)
Amount of remaining provision P100,000

Journal Entry: Warranty expense P100,000

Provision for warranty P100,000

6. In October 2020, Manila Government brought action against Harrison Company

in the amount of 1,900,000 for polluting Manila Bay. It is possible that Manila
Government will be successful in the case. The amount of damages based on
best estimate of the legal counsel is 1,200,000.
ANSWER: Contingent Liability because it is only possible to happened that the
company will be liable because of the damage. But incase that it will become
probable, the Harrison Company need to pay P1,200,000 estimated by legal
counsel.

7. Seller Company sold goods to Buyer Company for 200,000 on account on

October 20,2020. Before the year ended Buyer, company informed Seller
company that the company will not be able to pay its debts on time as the
company suffers from losses due to pandemic.
ANSWER: It is provision because buyer company still liable to seller company,
although he already admits that he will not be able to pay his debts on time, but
that doesn’t mean that he will not pay or he’s already free from the obligation. It
just the time of payment will become uncertain but the amount is still reliably
measurable.
Journal Entry: Loss from delayed payment of goods P 200,000
Provision for on account goods P200,000

8. A company has a private jet costing 24 million. Air regulations required it to be

overhauled every four years. An overhaul cost 1.6 million. The company policy
has been to create a provision for depreciation of 2 million on a straight-line basis
over twelve years and an annual provision of 400,000 to meet the cost of the
required overhaul every four years.
ANSWER: Accrued Expense because the cost of overhaul was already
recognized in the book before it gets paid. The amount of overhaul and date are
certain.
Journal Entry: Overhaul cost P 400,000
Accrued liability P400,000