FL NFL SHE SBP L IT EB

PROBLEM SET NO. 7

Contingencies and Other Liabilities
BAFACR4X
Intermediate Accounting III

Problem 7.1 CONTINGENCIES

Consider the following situations:
• In August 2020, the XYZ commenced a suit against DEF for alleged violation of anti-trust laws seeking
damages of P2,000,000. DEF denies the allegations, and as of December 31, 2020, it is not likely that DEF
will pay any damages as a result of this lawsuit.
• In September 2020, the Garrison Company became involved in lawsuit. As a result of this litigation, it
is more likely than not that Garrison will have to pay an amount ranging from P700,000 to P1,000,000
but P800,000 is considered to be the best estimate of the obligation.
• 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 suit against Dallas for damages to the vehicle.
Based on the police’s incident report, it is probable that estimated damages between P300,000 and
P500,000 will be incurred by Dallas. Each point within that range of amounts is considered as likely as
any other point. Dallas issued its 2020 financial statements in March 2021.
• 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 suit against Dallas for damages to the vehicle.
Based on the police’s incident report, it is probable that estimated damages between P300,000 and
P500,000 will be incurred by Dallas. In February 2021, Kansas accepted Dallas offer of P350,000 for
reimbursement of damages on its car. Dallas issued its 2020 financial statements in March 2021.
• During 2020, the Going Steady Company sold appliances that offer product warranties against defects.
Based on the entity’s and 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 costs were P1,000,000
if all products sold have major defects and P200,000 if all products sold have minor defects. Going
Steady has already incurred P60,000 of warranty costs relating to appliances sold during 2020.
• On October 2020, Manila City Government bought action against Harrison Company in the amount of
P1,900,000 for polluting Manila Bay. It is less than probable but more than remote that Manila City
government will be successful, but the amount of damages Harrison will have to pay is not reasonably
determinable at December 31, 2020.
• On December 10, 2020, there was an accident in a factory building causing damages to neighboring
structures. It is of remote chance that the company would not be required to pay indemnities to those
affected, the best estimate of which is P800,000.
Evaluate each of the following situations.

Problem 7.2 GIFT CERTIFICATES

Buchanan Company sells gift certificates redeemable only when merchandise is purchased. The certificates
have an expiration date of two years after issuance. Upon redemption or expiration, Buchanan recognizes the
unearned revenue as realized. Data for the year are as follows:
Unearned revenue, January 1 – P750,000
Gift certificates sold – P3,000,000
Gift certificates redeemed – P2,750,000
Expired gift certificates – P150,000
Cost of goods sold rate is 75%.
Prepare all journal entries to the foregoing.

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 FL NFL SHE SBP L IT EB

PROBLEM SET NO. 7

Contingencies and Other Liabilities
BAFACR4X
Intermediate Accounting III

Problem 7.3 SIMILAR ITEMS

Kojoy Company, a digital arts company, reports the following information:
• It outsources janitorial services to all its offices. At the beginning of the year it had Accrued Janitorial
Expenses of P20,000. Janitorial services received during the year was billed at P187,000. Payments in
connection to the services totaled P192,000 during the year.
• During the year, it started to accept digital layout contracts from its clients. Each contract requires 15%
non-refundable advance to be processed. A total of P1,210,000 worth of contracts were entered into
during the year. The aggregate contract price of those which were finished as of yearend is P600,000. A
P50,000 contract was cancelled by a client.
• It provides a 10% cash discount coupon for every P2,000 customer receipts during the year. These
coupons can be used for future service payments of its clients. Of the 400 coupons it received, only 40%
is expected to be used with an average purchase of P500. 100 coupons were used during the year.
Compute for the total liability as of yearend.

Problem 7.4 DEPOSITS

Collie-Cola, a bottling firm, requires a P2 deposit for all its sales of its famous soda drink. The deposit will be
returned within two years from sales conditional upon return of the bottles.
At the beginning of 2020, deposits amounting to P150,000 were still outstanding. Thirty percent of said amount
is applicable to sales made during 2018 and the balance from 2019.
Collections made during 2020 were P120,000 in connection to these deposits. Refunds are as follows:
• P30,000 for 2018 collections
• P85,000 for 2019 collections
• P60,000 for 2020 collections
Each bottle had a carrying amount of P1.40 as of yearend 2020.
1. How much is the liability as of yearend?
2. How much is the net effect of the transactions in the 2020 profit or loss?

Problem 7.5 DECOMMISSIONING LIABILITY

On January 1, 2020, an item of property, plant and equipment was purchased for P960,000. Estimated
dismantling costs of P75,000 is expected to be incurred after its five-year useful life. The appropriate discount
rate is 9%. At the time of dismantling, the actual costs were P80,000.
Compute for the net effect of the property, plant and equipment on the profit or loss for each year.

Problem 7.6 VALUE-ADDED TAX

During the third quarter of 2020, Cool Ethan Company, a VAT taxpayer, had the following sales and purchases.
Sales, net of VAT 470,400
Sales, gross of VAT 425,600
Purchases from VAT taxpayers, gross of VAT 302,400
Purchases from VAT taxpayers, net of VAT 181,000
Purchases from non-VAT taxpayers 70,000
Compute the amount of VAT payable.

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 FL NFL SHE SBP L IT EB

PROBLEM SET NO. 7

Contingencies and Other Liabilities
BAFACR4X
Intermediate Accounting III

Problem 7.7 BONUS

Garfield Company pays its general manager an annual bonus. For the year 2020, the company reported profit
of P8,000,000 before deductions for bonus and corporate income taxes. The corporate income tax is 30%.
Determine the amount of bonus under each of the following assumptions:
a.) Bonus is 8% of profit before deductions for both bonus and income taxes.
b.) Bonus is 8% of profit after deduction for bonus but before deduction for income taxes.
c.) Bonus is 8% of profit before deduction for bonus but after deduction for income taxes.
d.) Bonus is 8% of profit after deduction for both bonus and income taxes.

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