PROBLEM 4-1

Answer:
1. With respect to the first lawsuit,
the entity would recognize a loss
and accrue a liability of 1,000,000
as 51%
would be a viewed as probable.
2. In relation to the second lawsuit,
the entity would recognize and
accrue a liability for the midpoint
of the
range 4,000,000.
3,000,000 + 5,000,000 = 8,000,000
8,000,000 / 2 = 4, 000,000
3. With the respect to the third
lawsuit, the entity would consider
the time value of money and so
would
recognize a loss and accrue a
liability for the midpoint of the
range 2,000,000.
1,500,000 + 2,500,000 = 4,000,000
4,000,000 / 2 = 2,000,000
4. In relation to the fourth lawsuit,
the entity would make no accrual
as 25% would not be viewed as
probable.
Only a disclosure note is
appropriate.
Answer:

1. With respect to the first lawsuit, the entity would recognize a loss and accrue a liability of 1,000,000
as 51% would be a viewed as probable.

2. In relation to the second lawsuit, the entity would recognize and accrue a liability for the midpoint of
the range 4,000,000.

3,000,000 + 5,000,000 = 8,000,000

8,000,000 / 2 = 4, 000,000
3. With the respect to the third lawsuit, the entity would consider the time value of money and so would
recognize a loss and accrue a liability for the midpoint of the range 2,000,000.

1,500,000 + 2,500,000 = 4,000,000

4,000,000 / 2 = 2,000,000

4. In relation to the fourth lawsuit, the entity would make no accrual as 25% would not be viewed as
probable. Only a disclosure note is appropriate.

PROBLEM 4-3

1. Only a disclosure is necessary because it is not probable that the company will be liable, although the
amount can be measured reliably.

2. Retained earnings 200,000

Estimated liability for income tax 200,000

3. Accounts receivable – Sunset 120,000

Loss on guaranty 80,000

Note payable – bank 200,000

PROBLEM 4-5

- The shipping company shall recognize a provision for 5,000,000 because the claim of the
international freight forwarding company is probable.
No provision or disclosure would be needed for the 2,000,000 claim of the international freight
forwarding company because there is a remote possibility for the payment.
The shipping company shall also recognize a contingent asset of 4,500,000 (90% x 5,000,000),
because the amount is virtually certain of collection.

PROBLEM 4-11,

Requirement 1

2020

Jan. 1 Mining site 8,000,000

Cash 8,000,000

Jan. 1 Mining site 926,400

Decommissioning liability (2,000,000 x 0.4632) 926,400

Dec. 31 Interest Expense 74,112

Decommissioning liability (926,400 x 8%) 74,112

Requirement 2

2029

Dec. 31 Decommissioning liability 2,000,000

Cash 1,800,000

Gain on settlement of decommissioning liability 200,000

PROBLEM 4-15

Question 1 – D

Question 2 – D

Weighted probabilities:
20% x 200,000 x 70% 28,000
80% x 100,000 x 70% 56,000
Weighted cash flows 84,000
Multiply by risk adjustment factor (100% + 7%) 1.07
Adjusted cash flows 89,880
Multiply by PV of 1 at 5% for one period 0.95
Present value of cash flows 85,386

PROBLEM 4-33 10. C

1. B PROBLEM 4-34
2. D
1. D
3. D
2. D
4. C
3. C
5. A
4. C
6. A
5. D
7. C
8. A
9. C PROBLEM 4-35
 1. B 10. C
2. C
PROBLEM 4-37
3. B
4. D 1. B
5. B 2. A
3. D
PROBLEM 4-36
4. D
1. D 5. B
2. D
PROBLEM 4-38
3. C
4. D 1. A
5. B 2. D
6. A 3. D
7. B 4. C
8. D 5. D
9. A