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Chapter # Non-Financial liabilities, Provisions and Contingencies TRUE OR FALSE
- “Best estimate” is a matter of judgment and is usually based on past experience with similar transactions, evidence, provided by technical or legal experts, or additional evidence provided by events after reporting period. T
- Reimbursements by other parties should be taken into account when computing provision, only if it is virtually certain that the reimbursement will be received. T
- Under the expense warranty approach, companies charge warranty costs only to the period in which they comply with the warranty. F
- When provisions, contingent liabilities, and contingent assets are specifically addressed by other standards, then they are not within the scope of PAS 37 Provision, Contingent Liabilities and Contingent Assets. T
- When it is no longer probable that an outflow of resources would be required to settle the obligation, the provision should be reversed. T
- PAS 37 does not apply to financial instruments (including guarantees) that are within the scope of PFRS 9. T
- Returnable deposits are classified as current liabilities if the entity expects to refund them within one year, the current operating cycle notwithstanding. F
- Where the effect of the time value of money is material, the amount of provision should be the present value of the expenditure expected to be required to settle the obligation. T
- Changes in provisions shall be reviewed at each reporting date, and the amount of the provision should be adjusted accordingly as a change in accounting policy. F
- The expected profit from a sales type warranty that covers several years should all be recognized in the period the warranty is sold. F
- The cause for litigation must have occurred on or before the date of the financial statements to report a liability in the financial statements. T
- A provision should be used only for the purpose for which it was originally recognized or set up. T
- Future events that may affect the amount required to settle an obligation should be reflected in the provision amount where there is sufficient objective evidence that such future will in occur. T
- Provisions for future operating losses can be recognized. F
- A company discloses contingent assets in the notes only when a high probability exists for realizing them. T
- Gains from expected disposals of assets should be taken into account in arriving at the amount of the provision. F
- The fair value of an asset retirement obligation is recorded as both an increase to the related asset and a liability. T
- A contingent liability is a possible obligation arising from past events, the outcome of which will be confirmed only on the occurrence or nonoccurrence of one or more uncertain future events. T
- The amount to be recognized, as a provision is the best estimate of the expenditure required to settle the present obligation at the end of the reporting period. While a reliable estimate is usually possible, in rare circumstances, it may not be possible to obtain a reliable estimate. In such cases, the liability is to be disclosed as a contingent liability and not recognized as a provision. T
- Companies report the amount of social security taxes withheld from employees as well as the companies’ matching portion as current liabilities until they are remitted. T MULTIPLE CHOICE QUESTIONS
- It is an existing liability of uncertain amount or uncertain timing A. Contingent liability B. Discount on notes payable C. Unearned income D. Provision
- It is the statistical method of estimating a provision which means that where the provisions being measured involves a large population of items, the obligation is estimated by “weighting” all possible outcomes by their associated possibilities. A. Extrapolation B. Weighted average C. Simple average D. Expected value
- Where there is a continuous range of possible outcomes, and each point in that range is as likely as any other, the range to be used is the A. minimum B. sum of minimum and maximum C. maximum D. midpoint
- Which of the following sets of conditions would give rise to the accrual of a contingency? A. Amount of loss is reasonably estimable and event occurs infrequently. B. Amount of loss is reasonably estimable and occurrence of event is probable. C. Event is unusual in nature and occurrence of event is probable. D. Event is unusual in nature and occurs infrequently
- An estimated liability is an obligation that is uncertain as to Amount Existence A. Yes Yes B. Yes No C. No Yes D. No No
- Matic Company sells appliances that include a three-year warranty, Service calls under the warranty are performed by an independent mechanic under a contract with Matic. Based on experience, warranty costs are estimated at P300 for each machine sold. When should Matic Company recognize these warranty costs? A. Evenly over the life of the warranty B. When the service calls are performed C. When payments are made to the mechanic D. When the machines are sold
- Which of the following loss contingencies is normally accrued? A. Pending or threatened litigation B. General or unspecified business risk C. Obligations related to product warranties D. Risk of property loss due to fire
- A contingent liability A. Has a most probable value of zero but may require a payment if given future event occurs. B. Definitely exists as a liability but its amount or due date is indeterminate C. Is commonly associated with operating loss carry forwards D. Is not disclosed in the financial statements
- Which of the following should be recognized? Contingent Assets Contingent Liabilities Provisions A. Recognized Recognized Recognized B. Recognized Not Recognized Not Recognized C. Not Recognized Not Recognized Recognized D. Not Recognized Recognized Recognized
D. No footnote disclosure or accrual is necessary.
- On March 31, 2021, BRCI Co. received an advanced payment of 60% of the sales price for special- order goods to be manufactured and delivered within five months. At the same time, BRCI subcontracted for production of the special-order goods at a price equal to 40% of the main contract price. What liabilities should be reported in BRCI’s March 31, 2021 balance sheet? Deferred Revenue Payables to Subcontractor A. None None B. 60% of main contract price 40% of main contract price C. 60% of main contract price None D. None 40% of main contract price
- A retail store received cash and issued gift certificates that are redeemable in merchandise. The gift certificates lapse one year after they are issued. How would the deferred revenue accout be affected by each of the following transactions? Redemption of Certificates Lapse of Certificates A. Decrease No effect B. Decrease Decrease C. No effect No effect D. No effect Decrease
- When can a “provision” be recognized in accordance with PAS 37? A. When there is a legal obligation arising from a past (obligating) event, the probability of the outflow of resources is more than remote (but less than probable), and a reliable estimate can be made of the amount of the obligation. B. When there is a constructive obligation, as a result of a past (obligating event, the outflow of resources is probable, and a reliable estimate can be made of the amount of the obligation. C. When there is a possible obligation arising from a past event, the outflow of resources is probable, and an approximate amount can be set aside toward the obligation. D. When management decides that it is essential that a provision be made for unforeseen circumstances and keeping in this year the profits were enough but next year there may be losses.
- In 2020, a personal injury lawsuit was brought against Urza Co. Based in counsel’s estimate, Urza reported P50,000 liability in its December 31, 2020 balance sheet. In November 2021, Urza received a favorable judgment requiring the plaintiff to reimburse Urza for expenses of P30,000. The plaintiff has appealed the decision, and Urza’s counsel is unable to predict the outcome of the appeal. In its December 31, 2021 balance sheet, Urza should report what amounts of asset and liability related to these legal actions? Asset Liability A. P30,000 P50, B. P30,000 P C. P0 P20, D. P0 P
- Barrin Inc. has a self-insurance plan. Each year, retained earnings is appropriated for contingencies in an amount equal to insurance premiums saved less recognized losses from lawsuits and oother claims. As a result of a 2021 accident, Barrin is a defendant in a lawsuit in which it will probably have to pay damages of P190,000. What are the effects of this lawsuit’s probable outcome on Barrin’s 2021 financial statements? A. An increase in expenses and no effect on liabilities. B. An increase in both expenses and liabilities C. No effect on expenses and an increase in liabilities. D. No effect on either expenses or liabilities
- In June 2021, Ertai retailers sold refundable merchandise coupons. Ertai received P10 for each coupon redeemable from July 1 to December 31, 2021 for merchandise with a retail price of P11. At June 30, 2021, how should Ertai report these coupon transactions? A. Unearned revenues at the merchandise’s retail price. B. Unearned revenues at the amount of cash received. C. Revenues at the merchandise’s retail price. D. Revenue at the cash received amount.
- The board of directors of SYNERGIUM Inc. has decided on December 15, 2021 to wind up international operations in the Far East and move them to Australia. The decision was based on a detailed formal plan of restructuring as required by PAS 37. This decision was conveyed to all workers and management personnel at the headquarters in Europe. The cost of restructuring the operations in the Far East as per this detailed in its financial statements for the year-end December 31, 2021? A. Because of SYNERGIUM Inc. has not announced the restructuring to those affected by the decision and thus has not raised an expectation that SYNERGIUM Inc. will actually carry out the restructuring (and as no constructive obligation has arisen., only disclose the restructuring decision and the cost of restructuring of P2 million in footnotes to the financial statements. B. Recognize a provision for restructuring since the board of directors has approved it and it has been in the headquarters of SYNERGIUM Inc. in Europe. C. Mention the decision to restructure and the cost involved in the chairman’s statement in the annual report since it’s a decision of the board of directors. D. Because the restructuring has not commenced before year-end, based on prudence, wait until next year and do nothing in this year’s financial statements.
- Under PFRS, which of the following accounts would not be considered a “provision”? A. Warranty liabilities B. Bad debts C. Taxes payable D. Note payable
- Management can estimate the amount of loss that will occur if a foreign government expropriates some company assets. If expropriation is reasonably possible a loss contingency should be A. Disclosed but not accrued as a liability B. Disclosed and accrued as a liability C. Accrued as a liability but not disclosed D. Neither accrued as a liability nor disclosed
- During 3033, Mangara filed suit against Volrath, Inc. seeking damages for patent infringement. At December 31, 2022, Mangara’s legal counsel believed that it was probable that Mangara would be successful against Volrath for an estimated amount in the range of P75,000 to P150,000 with all amounts in the range considered equally likely. In March 2023, Mangara was awarded P100,000 and received full payment thereof. In its 2022 financial statement, issued in February2023, how should this award be reported? A. As a receivable and revenue of P100, B. As a receivable and deferred revenue of P100, C. As a disclosure of a contingent gain of P100, D. As a disclosure of contingent asset of an undetermined amount in the range of P75,000 to P150,
- In 2021, a contract dispute between Rashida Co. and Karn Co. was submitted to binding arbitration. In 2021, each party’s attorney indicated privately that the probable award in Rashida’s favor could be reasonably estimated. In 2022, the arbitrator decided in favor of Rashida. When should Rashida and Karn recognize their respective gain and loss? Rashida’s Gain Karn’s Loss A. 2021 2021
The recurring biweekly salaries total P720,000. In the remaining work days of June, overtime pay earned amounted to P18,000. (1) How much is Burgundy Company’s accrued salaries at June 30, 2021? A. P299, B. P297, C. P351, D. P369, B. Apachi Company must determine the December 31, 2021 year-end accruals for advertising and rent expenses. On January 3, 2022, Apachi Company received a P100,000 advertising bill, comprising of P37,500 for newspaper advertisement that will be published monthly in the year 2022. The store lease effective August 1, 2021 calls for fixed rent of P120,000 per month payable on or before the 5th^ day of the current month. Included in the lease contract is contingent rent equal to 3% of net sales over P2,000,000 per month that is requires to be paid on the 20 th^ day of the following month. Net sales for December 2021 were P5,500,000. (2) In its December 31, 2021 statement of financial income, Apachi Company should report accrued liabilities of A. P105, B. P142, C. P167, D. P262, C. On September 1, 2020, Tom Company borrowed on a P1,650,000 note payable from PDAC Bank. The note bears interest at 12% and is payable in three equal annual payments of P550,000. On this date, the bank’s prime rate is 11%. The first annual payment for interest and principal was made in September 1, 2021. (3) At December 31, 2021, what amount should Tom Company report as accrued interest payable? A. P66, B. P60, C. P44, D. P40, D. In its 2021 financial statements, Toronto Company reported interest expense of P85,000 in its statement of comprehensive income and cash payments for interest at P68,000 in its statementof cash flows. There was no prepaid interest or interest capitalization either at the beginning or end of
- Accrued interest payable at December 31, 2020 was P15, (4) What amount should Toronto Company report as accrued interest payable in its December 31, 2021 statement of financial of financial position? A. P32, B. P17, C. P15, D. P2, E. On July 31, 2021, Joe Company issued a five-year note payable with a face amount of P2,400,000 and an interest rate of 10%. The terms of the note require Joe Company to make five equal annual payment of accrued interests, with the first payments due on July 31, 2022. (5) With respect to the note, the current liabilities section of Joe Company’s December 31, 2021 statement of financial income include A. P480, B. P580,
C. P620,
D. P720,
F. Dexter Company requires advanced payments with special orders for machinery constructed to customer specifications. These advances are refundable. Data for the year are Customer advances, January 1 P 5,800, Advances received with orders 12,000, Advances applied to orders shipped 10,700, Advances applicable to orders cancelled 2,500, (6) How much is the liability for customer advances at the end of the year? A. P2,000, B. P2,500, C. P4,600, D. P7,100, G. During 2021, Mega Publishing, a newly organized magazine publisher, received payment of P44, for the subscriptions of their two high-end magazines that were being issued monthly (twelve times a year). Magazine Number of Subscriptions Annual Subscription Price Universal Time 100 P3, Condo International 60 2, Of the 100 Universal Time subscriptions, effectivity date of the 55 subscriptions was January 1, 2021, while the remainder had April 1, 2021 effectivity. All of the Condo international magazine subscriptions started with the maiden issue published in May 2021. (7) What amount should Mega Publishing report in its December 31, 2021 statement of financial position as unearned subscriptions revenue? A. P197, B. P129, C. P89, D. P81, H. Mega Department Store sells gift certificates that are redeemable only when the merchandise is purchased from its stores. It is the company policy to recognize the amount redeemed as realized. During 2021, Mega Department Store sold gift certificates amounting to P1,800,000 and redeemed gift certificates worth P1,560,000. Gift certificates outstanding at January 1, 2021 is P520,000. The company’s gross profit rate is 40%. (8) What is the liability for outstanding gift certificates at December 31, 2021? A. P760, B. P720, C. P680, D. P520,
(12) How much is the unearned service contract revenue at December 31, 2021? A. P2,130, B. P1,930, C. P1,200, D. P300, (13) How much is the service contract revenue for the year ended December 31, 2020? A. P210, B. P600, C. P620, D. P1,000, (14) What is the net revenue from service contracts for the year 2021? A. P270, B. P520, C. P620, D. P850, L. An entity sells goods that carry two-year warranty. If minor repairs were to be required on all goods in 2021, the repair cost would be P100,000. If major repairs were needed on all goods sold, the cost would be P500,000. It is estimated that 80% of the goods sold in 2021 will have no defects, 15% will have minor defects and 5% will have major defects. (15) The provision for repairs required on December 31, 2021 is A. P40, B. P100, C. P300, D. P500, M. Des Moines Company introduced during 2020, a new television model with a two-year warranty against defects. Des Moines Company estimates the warranty costs at 2% of peso sales within 12 months following the sale. Sales and actual warranty expense for the year ended December 31, 2020 are P3,000,000 and P45,000, respectively, and for the year ended December 31, 2021 are P5,000, and P150,000, respectively. (16) Des Moines Company should report an estimated warranty liability in its December 31, 2021 statement of financial position of A. P285, B. P225, C. P85, D. P50, N. Sam Company started business in 2020. It sells printers with a three-year warranty. Sam Company estimates its warranty cost as a percentage of peso sales. Based on past experience, it is estimated that 2% will be repaired during the first year of warranty, 4% will be repaired during the second year of warranty and 6% will be repaired in the third year. In 2020 and 2021, the company was able to sell 7.500 units and 8,400 units, respectively at a selling price of P5,000 per unit. The company also incurred actual repair costs of P53,000 and P1,176,000 in 2020 and 2021, respectively. (17) What amount should Sam Company report as warranty expense in 2020? A. P7,834,
B. P5,040,
C. P4,500,
D. P3,970,
(18) What is the amount of liability for warranty reported in Sam Company’s December 31, 2021 statement of financial position? A. P7,834, B. P5,040, C. P4,500, D. P3,024, (19) Assuming that sales and repair occur evenly throughout the period, how much would be the predicted warranty expense covering 2020 and 2021 sales still under warranty at December 31, 2021? A. P8,790, B. P7,834, C. P7,620, D. P6,450, O. The Nice Food Company is engaged in a sales promotion, giving a rebate of P4.00 for every food box returned. It is estimated that 80% of the food boxes will be returned and receive the rebate. Included in the promotion and sold are 50,000 boxes with the selling price of P1,250,000. Rebates already given amounted to P48,000. (20) How much is the remaining liability? A. P160, B. P152, C. P112, D. P48, P. With the end goal of attracting as much customers as possible in the NCR region, Abeson Appliance Company engaged in a customer satisfaction program and marketing strategy for two of their major lines of products: (1) electrical appliances and (2) household and office furniture. All branched in the region are participating in the company’s promotions. In the customer satisfaction program, Abeson Company provides one-year warranty for replacement of parts and replacement of parts and labor of the electrical appliances sold. Based on past experience, the estimated warranty cost is 3% of sales. During 2021, total sales of electrical appliances was P7,200,000. Replacement parts and labor for warranty work totaled P184,000 during
In the company’s marketing strategy for the household and office furniture section, customers are given a coupon for every P1,000 spent on these items. Customers may exchange 10 coupons for every P500 for a “hot and cold” water dispenser. Each water dispenser cost Abeson Company P1,200 and estimates that 40% of the coupons given to the customers will be redeemed. During 2021, sales of household and office furniture totaled P2,600,000. A total of 100 water dispensers used in the promo were purchased and there were 800 coupons redeemed in 2021. The accrual method is used by Abeson to account for the warranty and premium costs for financial reporting purposes. The balances in the accounts related to warranties and premiums on January 1, 2021 were as follows: Inventory of “hot and cold” water dispensers 30 units Estimated premium claims outstanding P17, Estimated liability for warranty P80,
R. The Jones Company enjoys profitable operations for its past ten years of existence. The company president proposed to the Board of Directors an incentive compensation plan where the general manager would be entitles to a year=end bonus the following alternative schemes. Alternative 1: 8% bonus based on profit before bonus and income tax in excess of P5,000,000. Alternative 2: 5% bonus based on profit after both bonus and income tax. Alternative 3: 3% bonus based on profit after bonus but before income tax. Jones Company’s profit before bonus and income ta for the year-ended December 31, 2021 is P8,000,000. Assume an income tax rate of 30%. (27) How much is the general manager’s bonus for 2021 under Alternative 1? A. P240, B. P320, C. P400, D. P640, (28) How much is the general manager’s bonus for 2021 under Alternative 2? A. P215, B. P262, C. P270, D. P290, (29) How much is the general manager’s bonus for 2021 under Alternative 3? A. P247, B. P240, C. P233, D. P184, S. Buffy Company provides an incentive compensation plan under which its president is to receive a bonus equal to 10% of the profit in excess of P1,000,000 before deducting income tax but after deducting the bonus. Profit after income tax of 30% is P2,100, (30) How much is the president’s bonus? A. P129, B. P200, C. P210, D. P220, T. Toyonda Cubao, Inc. (TCI) is a dealer of Toyonda trucks and automobiles. TCI distributes annual bonuses to its Vice President for Sales and three division managers, namely: Truck Division, SUV Division and AUV and Sean Division. The company reported P12,000,000 profit for 2021 before bonuses and income tax. Income tax rate is 30%. (31) How much should the vice president and each division managers receive, respectively, if the vice president gets 3% and each division manager gets 1% of profit after bonuses but before income taxes? A. P339,623 and P113, B. P169,811 and P169, C. P382,979 and P127,
D. P191,489 and P191, (32) Assume that the bonus for the vice president and three division managers is 2% each based on profit after bonuses but before income taxes, how much is the income tax payable at the end of the year? A. P3,286, B. P3,317, C. P3,333, D. P3,600, U. Jel Company sells its products in reusable expensive containers. The customer is charged a deposit for each container delivered and receives a refund for each container returned within two years after the year of delivery. Jel Company accounts for any containers not returned within the time limit as being retired by sale at the deposit amount. Information relating to customer deposits follows: Containers held by customers at December 31, 2020 from deliveries in 2019 P 75, 2020 215, Containers delivered in 2021 P290, Containers returned in 2021 from deliveries in 2019 P 45, 2020 125, 2021 143,000 313, (33) What amount should Jel Company report as a liability for deposits on returnable containers at December 31, 2021? A. P247, B. P322, C. P337, D. P367, V. On the first day of each month, Jake Realty receives from Carlo Company an escrow deposit of P25,000 for real estate taxes. Jake Realty records the P25,000 in an escrow account. Carlo Company’s estate tax for the year ended December 31, 2021 is P280,000, payable in equal installment on the first day of each calendar quarter. On December 31, 2020, the balance in the escrow account of Carlo Company was P30,000. Realty’s fiscal year ends on September 30. (34) On September 30, 2021, what amount should Jake Realty show as an escrow liability to Carlo Company? A. P 15, B. P 45, C. P 85, D. P115, W. Snoopy Company is engaged in the manufacture of chemicals that it exports to other countries. On December 20, 2021, one of its storage tanks in the plant exploded. Unfortunately, one of its employees was caught by the accident and suffered burns all over his body. For damages sustained because of the explosion, the employees sued Snoopy Company and claimed an amount totaling P3 million for physical injuries sustained. The lawyer of Snoopy Company expects that the company will probably lose the lawsuit and estimates that the company may have to pay the amount of P2.5 million. On March 10, 2022, upon advice of the lawyer, the injured employee offered to have an out-of-court settlement of P2 million. The offer was tendered on the same date and Snoopy accepted the offer on March 12, 2022 upon advice of its legal counsel. The financial statements for the year 2021 were issued on March 31, 2022.
D. No loss contingency but disclose a contingency of P400,000 to P2,000,000. BB. Hay Company won a litigation for P45,000 tripled to P135,000 to include punitive damages during January 2021. Only the P90,000 punitive damages were appealed by the defendant. In an unrelated suit it filed, which is still on appeal by the defendant, Hay was awarded P145,000. The outcome on these appeals could not be estimated by the counsel. (40) How much should Hay Company report as pretax gain in 2021? A. P45, B. P135, C. P150,
D. P285,
