BM2218

NAME: S a m o y , P r e c i o u s J o y
1

APPLICATION OF CONCEPTS

I. Provisions, Contingent Liabilities and Contingent Assets

Catibayan Co. is engaged in transport services. A lawsuit was filed against Catibayan Co. regarding a road
accident that occurred late in December 20x1. Catibayan Co.’s legal counsel believes that Catibayan Co.
will probably lose the case and pay damages. Sufficient data is available to make a reliable estimate of
damages.

Required: Should Catibayan Co. accrue a provision of December 31, 20x1? Provide a brief explanation of
your answer. (5 points)

For Catibayan Co., it's advisable to create a provision as of December 31, 20x1, concerning the lawsuit
from the road accident. The legal counsel's belief that they'll likely lose and the ability to estimate damages
reliably typically triggers the need to recognize a provision for expected losses under accounting standards. This
provision signifies an anticipated liability for the damages Catibayan Co. is expected to pay. Given that the harm
has occurred, there's an existing obligation that Catibayan Co. must address to rectify the situation.

II. Employee Benefits

An entity reports a profit before bonus and taxes of ₱200,000 during the year. The entity has an established
policy of paying its top management a 2% bonus on annual profit. The entity is subject to an income tax
rate of 30%.

Required: Compute the amount of bonus under each of the following bonus schemes (4 items x 5 points):
a. Bonus is based on profit before deducting bonus and income tax.
b. Bonus is based on profit after deducting bonus but before deducting income tax.
c. Bonus is based on profit before deducting bonus but after deducting income tax.
d. Bonus is based on profit after deducting bonus and income tax.

A. Bonus is based on profit before deducting bonus and income tax.

Bonus = Profit x Bonus

= 200,000 x 2% (0.02)
= Php 4,000

B. Bonus is based on profit after deducting bonus but before deducting income tax.

Bonus = Profit - (Profit / 1 + Bonus)

= 200,000 - (200,000 / 1 + 0.02)

= 200, 000 - (200,000 / 1.02)
= 200, 000 - 196, 078.43
= Php 3,921. 58 / Php 3, 922
 To check:

Income before bonus and tax 200,000

Less: Bonus 3, 922
Income after bonus and tax 196,079
Multiply by 0.02
BONUS 3,921. 58

C. Bonus is based on profit before deducting bonus but after deducting income tax.

Bonus = Profit x 1 - Tax rate

1/ Bonus rate - Tax rate

= 200, 000 x 1- 0.30

1/ 0.02 - 0.30

= 200, 000 x 0.7

49.7

= Php 2, 816. 90 / Php 2, 817

D. Bonus is based on profit after deducting bonus and income tax.

Bonus = Profit x 1 - Tax rate

1/ Bonus rate - Tax rate + 1

= 200, 000 x 1- 0.30

1/ 0.02 - 0.30 + 1

= 200, 000 x 0.7

50. 7

=Php 2, 761. 34

FOR SHORT ANSWER

CRITERIA PERFORMANCE INDICATOR POINTS
Content Provided pieces of evidence,
supporting details, and factual scenarios 3

Organization of Expressed the points in a clear and

2
ideas logical arrangement of ideas
TOTAL 5

FOR PROBLEM-SOLVING
CRITERIA POINTS
Complete the solution with the correct answer. 5
Half of the solution is correct. 3

06 Performance Task 1 *Property of STI

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