Question

the entity is defending against a third lawsuit but the relevant loss will only occur far into the future. the present values of the endpoints of the range are p1,500,000 and p2,500,000.
the management believes the effects of time value of money on these amounts are material but also believes the timing of these amounts is uncertain.
the entity is defending against a fourth lawsuit and believes there is only a 25% chance it will lose in court.
if the entity loses, management believes damages will fall somewhere in the range of p3,000,000 to p4,000,000 with each amount in that range equally likely to occur.
required:
indicate how the entity would disclose or account for the four lawsuits under ifrs in the financial statements for the year ended december 31, 2020.

problem 2
bourne company provided the following selected transactions related to contingencies. the fiscal year ends on december 31, 2020 and financial statements are issued on march 31, 2021.
bourne is involved in a lawsuit resulting from a dispute with a customer over a 2020 transaction. on december 31, 2020, attorneys advised that it was probable that bourne would lose p3,000,000 in an unfavorable outcome.
on february 15, 2021, judgment was rendered against bourne in the amount of p4,000,000 plus interest p500,000. bourne does not plan to appeal the judgment.
since august 2020, bourne has been involved in labor dispute. negotiations between the entity and the union have not produced a settlement. since january 2020, strikes have been ongoing at these facilities.
it is virtually certain that material costs will be incurred but the amount of resultant costs cannot be adequately predicted.
bourne is the defendant in a lawsuit filed in january 2021 in which the plaintiff seeks p5,000,000 as an adjustment to the purchase price related to the sale of bournes hardwood division in 2020. the lawsuit alleges that bourne misrepresented the divisions assets and liabilities.
legal counsel advised that it is reasonably possible that bourne could lose p2,000,000 but that it is extremely unlikely that it would lose p5,000,000 asked for.
on march 1, 2021, the provincial government is in the process of investigating the possibility of environmental violation by bourne but has not proposed a penalty assessment.
management feels an assessment is reasonably possible and if an assessment is made, a settlement of up to p4,000,000 is probable.
required:
prepare journal entries that should be recorded as a result of the contingencies.

mcq 1
toyo company owns a car dealership that it uses for servicing cars under warranty.
in preparing the financial statements, the entity needs to ascertain the provision for warranty that it would be required to provide at the end of the year.
the entitys experience with warranty claims is:
60% of all cars sold in a year have zero defect, 25% of all cars sold in a year have normal defect, and 15% of all cars sold in a year have significant defect.
the cost of rectifying a normal defect in a car is p10,000. the cost of rectifying a significant defect in a car is p30,000.
the entity sold 500 cars during the year.
what is the expected value of the warranty provision for the current year?
a. 3,500,000
b. 1,750,000
c. 1,400,000
d. 4,000,000

Explanation:

Step1: Calculate expected cost for each defect - type

For zero - defect cars: The probability of zero - defect cars is $P_1 = 0.6$, and the cost per car is $C_1=0$.
For normal - defect cars: The probability of normal - defect cars is $P_2 = 0.25$, and the cost per car is $C_2 = 10000$.
For significant - defect cars: The probability of significant - defect cars is $P_3=0.15$, and the cost per car is $C_3 = 30000$.

Step2: Calculate the expected cost per car

The expected cost per car $E(C)$ is calculated using the formula $E(C)=\sum_{i = 1}^{n}P_iC_i$.
$E(C)=P_1C_1+P_2C_2 + P_3C_3=0.6\times0+0.25\times10000 + 0.15\times30000$.
$E(C)=0 + 2500+4500=7000$.

Step3: Calculate the total expected value of the warranty provision

The entity sold $n = 500$ cars. The total expected value of the warranty provision $E(T)$ is $E(T)=E(C)\times n$.
$E(T)=7000\times500 = 3500000$.

Answer:

a. 3,500,000