Problem 4-1

1. With the respect to the first lawsuit, the entity would recognize a loss and accrue liability of
₱1,000,000 at 51% would be 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. 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 of ₱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 to disclosure note is appropriate

Problem 4-5
₱5,000,000 (Shipping company shall recognize a provision)
Reason: The claim for international freight forwarding company is probable
₱2,000,000 (No provision or disclosure for the claim of international freight forwarding company)
Reason: There is a remote possibility for the payment
₱4,500,000 (90% x ₱5,000,000) (Shipping company shall recognize a contingent asset)
Reason: The amount is virtually certain of collection

Problem 4-6
Restructuring Costs ₱1,730,000
Estimated Liability for Restructuring Costs ₱1,730,000

Unpaid entitlement of retrenched 200 employees ₱1,500,000

Unpaid retrenchment package of one executive tasked closure of
Mindanao branch 200,000
Unpaid salary of the executive related to closure of Mindanao
branch (60% x 50,000) 30,000
Total provision for restructuring ₱1,730,000
*₱400,000 (Expected to be incurred in transferring the 50 employees to Manila) – Ongoing Operations
*Only 60% of the January salary is included – remainder relates to the transfer of the 50 employees in
Manila and general administration
 Problem 4-9
1. No disclosure is required because a claim by the city government is as not yet asserted and an
assessment is not probable.
2. The lawsuit against Faye Company is gain in contingency. Contingent gain is not accrued even if
the gain is probable and reasonable estimable. The gain should be recognized only when
realized. Baron will disclose information in the notes to the financial statements.
3. The case with the provincial government is a loss contingency. Baron can use the information
occurring after the end of the year in determining appropriate disclosure. Baron should accrue
the ₱2,000,000 loss because the ultimate outcome appears settled and the loss is probable.

Litigation Loss ₱2,000,000

Litigation Liability ₱2,000,000

4. The dispute with a customer is loss contingency. Baron can use the information occurring after
the end of the year in determining appropriate disclosure. It is unlikely that Baron would choose
to accrue the ₱1,800,000 loss because the judgment will be appealed and that the outcome is
uncertain. A disclosure note is appropriate.

Problem 4-12
2020
Jan. 1 Detoxification facility ₱9,000,000
Cash ₱9,000,000
1 Detoxification facility 840,000
Decommissioning Liability (1,500,000 x .56) 840,000
Dec. 31 Depreciation 984,000
Accumulated Depreciation (9,840,000/10) 984,000
31 Interest Expense 50,400
Decommissioning Liability (6% x 840,000) 50,400
2022
Jan. 1 Detoxification facility 126,000
Decommissioning Liability (200,000 x .63) 126,000
Dec. 31 Depreciation 999,750
Accumulated Depreciation 999,750

*Original Cost ₱984,000

Additional Cost (126,000/8) 15,750
Total Depreciation ₱999,750

Dec.31 Interest Expense 64,189

 Decommissioning Liability 64,189

*Original Liability ₱840,000

Interest for 2020 (6% x 840,000) 50,400
Carrying Amount ₱890,400
Interest for 2021 (6% x 890,400) 53,424
Carrying Amount ₱943,824

Interest for 2022 (6% x 943,824) ₱56,629

Interest for 2022 on additional liability (6% x 126,000) 7,560
Total Interest for 2022 ₱64,189

2029
Dec. 31 Accumulated Depreciation 9,966,000
Detoxification Facility 9,966,000

*Purchase Price ₱9,000,000

Original Decommissioning Cost 840,000
Additional Decommissioning Cost 126,000
Total Cost ₱9,966,000

Dec. 31 Decommissioning Liability 1,700,000

Loss on Settlement of Decommissioning Liability 300,000
Cash 2,000,000

Problem 4-13
Normal Defect (500 x ₱10,000 x 25%) ₱1,250,000
Significant Defect (500 x ₱30,000 x 15%) 2,250,000
Total Warranty Provision A ₱3,500,000

Problem 4-16
1. Weighted Probabilities:
 60% x 2,000,000 x 80% ₱960,000
40% x 1,000,000 x 80% 320,000
Weighted Cash Flows ₱1,280,000
Risk Adjustment Factor (8% x 1,280,000) 102,400
Undiscounted Cash Flows A ₱1,382,400

2. Adjusted Cash Flow ₱1,382,400

Multiply by: PV of 1 at 12% for one period .89
Provision 12/31/2020 C ₱1,230,336

Problem 4-21
Accrued Liability 12/31/2020 C ₱500,000
*The best estimate is recorded. The accepted BIR offer is not recorded because it was made after the
statements are issued

Problem 4-24
B. A loss contingency of ₱3,600,000 and disclose an additional contingency of up to ₱2,400,000

Problem 4-27
Income from the lawsuit 12/31/2020 D 0
*Contingent assets are not recognized in financial statements since this may result in the recognition of
income that may never be realized. A contingent asset and the related contingent gain are disclosed
only where the inflow of economic benefits is probable