3-ADJUSTMENT FOR LOSS CONTINGENCIES The following items have not been reflected in the financial statements of ALTAGRACIA CORP. for the year ended December 31, 2007. You are asked if the information should be adjusted and disclosed in the financial statements, disclosed only in the financial statement, or no adjustment or disclosure. 1. Altagracia owns a small warehouse located on the banks of a river in which it stores inventory worth approximately P250,000. Altagracia is not insured against flood losses. The river last overflowed its banks 200 years ago. a. Adjusted and disclosed in the financial statements. b. Only disclosure is required in the financial statements. c. No adjustment or disclosure required in the financial statements. 2. Altagracia offers an unconditional warranty on its toys. Based on past experience, Altagracia estimates its warranty expense to be 1% of sales. Sales during 2007 were P5,000,000. a. Adjusted and disclosed in the financial statements. b. Only disclosure is required in the financial statements. c. No adjustment or disclosure required in the financial statements. 3. On October 30, 2007, a safety hazard related to one of Altagracia's toy products was discovered. It is considered probable that Altagracia will be liable for an amount in the range of P50,000 to P250,000. a. Adjusted and disclosed in the financial statements. b. Only disclosure is required in the financial statements. c. No adjustment or disclosure required in the financial statements. 4. On November 29, 2007, Altagracia initiated a lawsuit seeking P125,000 in damages from a patent infringement. a. Adjusted and disclosed in the financial statements. b. Only disclosure is required in the financial statements. C. No adjustment or disclosure required in the financial statements. 5. On December 15, 2007, a former employee filed a lawsuit seeding P50,000 for unlawful dismissal. Altagracia's attorneys believe the suit is without merit. No court date has been set. a. Adjusted and disclosed in the financial statements. b. Only disclosure is required in the financial statements. c. No adjustment or disclosure required in the financial statements. 6. On December 12, 2007, Conchita guaranteed a bank loan of P500,000 for its president's personal use. a. Adjusted and disclosed in the financial statements. b. Only disclosure is required in the financial statements. c. No adjustment or disclosure required in the financial statements. 7. On January 5, 2008, a warehouse containing a substantial portion of Altagracia's inventory was destroyed by fire. Altagracia expects to recover the entire loss, except for a P125,000 deductible from insurance. a. Adjusted and disclosed in the financial statements. 4 b. Only disclosure is required in the financial statements. c. No adjustment or disclosure required in the financial statements. 8. On January 5, 2008, inventory purchased FOB shipping point from a foreign country was detained at that coutnry's border because of political unrest. The shipment is valued at P750,000. Altagracia's attorneys have stated that it is probable that Altagracia will be able to obtain the shipment. a. Adjusted and disclosed in the financial statements. b. Only disclosure is required in the financial statements. c. No adjustment or disclosure required in the financial statements. 9. On January 30, 2008, Altagracia issued P5,000,000 bonds at a premium of P250,000. a. Adjusted and disclosed in the financial statements. b. Only disclosure is required in the financial statements. c. No adjustment or disclosure required in the financial statements. 21 10. On February 14, 2008 the RTD assesse Altagracia an acoonal P200,000 for the 2001 tax year. Altagracia's Page and tax ccountants havtated that it is likely that the BIR will agree to a P150,000 settlement. a. Adjusted and disclosed in the financial statements. b. Only disclosure is required in the financial statements. c. No adjustment or disclosure required in the financial statements