PROBLEM 1: TOY COMPANY

First lawsuit 1,000,000

Second lawsuit (midpoint of range) 4,000,000
Third lawsuit (midpoint of range) 2,000,000
Fourth lawsuit (25% chance- possible) -
Total accrued litigation liability 7,000,000

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 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. In 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 2: SUNRISE COMPANY

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 3: TROY COMPANY

1. 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 task
to complete closure of Mindanao Branch 200,000
Unpaid salary of the executive related
to closure of Mindanao branch (60%*50,000) 30,000
Total Provision for restructuring 1,730,000