1. In 20x1, a lawsuit was filed against WINSOME CAUSING PLEASURE Co.

for patent
infringement. The plaintiff is claiming ₱400M in damages. WINSOME’s legal counsel believes
that it is probable that WINSOME will lose the lawsuit and pay damages of not less than ₱40M
but not more than ₱400M. The probability of any amount within the range is as likely as any
other amount also within the range. The plaintiff has offered to settle the lawsuit out of court for
₱360M but WINSOME did not agree to the settlement. How much is provision to be reported in
WINSOME’s year-end financial statements?
a. 360M b. 220M c. 400M d. 40M

2. In 20x1, EXHAUSTIVE COMPLETE Co. received a court order requiring the cleanup of
environmental damages caused by one of EXHAUSTIVE’s factory. EXHAUSTIVE has no other
realistic alternative but to comply with the court order. Other entities have incurred around
₱60M for similar cleanup; however, EXHAUSTIVE’s best estimate of the cost of cleanup is ₱80M.
How much is the provision to be recognized?
a. 60M b. 80M c. 70M d. 0

3. In 20x1, LUMINOUS SHINING Co. recalled a product due to a possible defect caused by a
malfunctioning factory equipment. The products recalled will be repaired free of charge.
LUMINOUS is uncertain whether all products recalled will have the possible defect. However,
the following estimate was made by LUMINOUS’s engineers and managerial accountants and
approved by the board of directors.
Probabilit
Repair cost y
80,000,000 5%
60,000,000 20%
40,000,000 35%
20,000,000 40%
100%

How much is the provision to be recognized?

a. 38M b. 50M c. 48M d. 32M

4. A manufacturer gives warranties at the time of sale to purchasers of its product. Under the terms
of the contract of sale, the manufacturer undertakes to make good, by repair or replacement,
manufacturing defects that become apparent within one year from the date of sale. On the basis
of experience, it is probable (i.e., more likely than not) that there will be some claims under the
warranties.

Sales of ₱40 million were made evenly throughout 20X1.

At December 31, 20x1 the expenditures for warranty repairs and replacements for the product sold
in 20x1 are expected to be made 50% in 20x1 and 50% in 20x2. Assume for simplicity that all the 20x2
outflows of economic benefits related to the warranty repairs and replacements take place on June
30, 20x2.
Experience indicates that 95% of products sold require no warranty repairs; 3% of products sold
require minor repairs costing 10% of the sale price; and 2% of products sold require major repairs or
replacement costing 90% of sale price. The entity has no reason to believe future warranty claims
will be different from its experience.

At December 31, 20x1, the appropriate discount factor for cash flows expected to occur on June 30,
20x2 is 0.95238. Furthermore, an appropriate risk adjustment factor to reflect the uncertainties in the
cash flow estimates is an increment of 6 per cent to the probability-weighted expected cash flows.

How much is the warranty provision at December 31, 20x1?

a. 424,000 b. 840,000 b. 800,000 d. 752,000

Use the following information for the next two questions:

RISIBLE FUNNY Co. provides 3-year warranty for the products it sells. RISIBLE estimates that
warranty costs ₱400 per unit sold. As of January 1, 20x1, the liability for warranty has a balance of
₱800,000 for units sold in 20x0. During the year RISIBLE sold 5,000 units and actual warranty costs
incurred were ₱1,240,000.

5. How much is the warranty expense to be recognized in 20x1?

a. 2,000,000 b. 1,240,000 c. 3,240,000 d. 4,240,000