1. During 2020, Lan Company is the defendant in a breach of a patent lawsuit. The lawyers believe there is an 80% chance that the court will not dismiss the case and the entity will incur an outflow of benefits. If the court rules in favor of the claimant, the lawyers believe that there is a 60% chance that the entity will be required to pay damages of P2,000,000 and a 40% chance that the entity will be required to pay damages of P1,000,000. Other amounts of damages are unlikely. There is no indication that the claimant will settle out of court. The court is expected to rule in late December 2021. An 8% risk adjustment factor to the cash flows is considered appropriate to reflect the uncertainties in the cash flow estimates. The appropriate discount rate is 12%. The PV of 1 at 12% for one period is .89. What is the amount of undiscounted cash flows for the provision? *

A.1,280,000 B.1,036,800 C. 1,382,400 D. 1,620,000

2. In 2020, Lan Company is the defendant in a breach of a patent lawsuit. The lawyers believe there is an 80% chance that the court will not dismiss the case and the entity will incur an outflow of benefits. If the court rules in favor of the claimant, the lawyers believe that there is a 60% chance that the entity will be required to pay damages of P2,000,000 and a 40% chance that the entity will be required to pay damages of P1,000,000. Other amounts of damages are unlikely. There is no indication that the claimant will settle out of court. The court is expected to rule in late December 2021. An 8% risk adjustment factor to the cash flows is considered appropriate to reflect the uncertainties in the cash flow estimates. The appropriate discount rate is 12%. The PV of 1 at 12% for one period is .89. What is the measurement of the provision on December 31, 2020? *

A.922,752 B.1,139,200 C.1,230,336 3 D. 1,335,000

3. On November 25, 2020, an explosion occurred at a Rye Company plant causing extensive property damage to area buildings. By March 10, 2021, claims had been asserted against Rye Company. The management and counsel concluded that it is probable Rye Company will be responsible for damages and that P3,500,000 would be a reasonable estimate of the liability. The entity’s P10,000,000 comprehensive public liability policy has a P500,000 deductible clause. The financial statements for 2020 were issued on March 25, 2021. What amount of loss from the lawsuit should be reported in the income statement for 2020? *

A. 3,500,000 B.500,000 C.3,000,000 D.0

4. On November 25, 2020, an explosion occurred at a Rye Company plant causing extensive property damage to area buildings. By March 10, 2021, claims had been asserted against Rye Company. The management and counsel concluded that it is probable Rye Company will be responsible for damages and that P3,500,000 would be a reasonable estimate of the liability. The entity’s P10,000,000 comprehensive public liability policy has a P500,000 deductible clause. The financial statements for 2020 were issued on March 25, 2021. What is the amount of liability from the lawsuit that should be reported on December 31, 2020? *

A. 750,000 B.3,500,000 C.1,750,000 D.1,500,000

5. Nice Company is involved in litigation regarding a faulty product sold in a prior year. The entity has consulted with an attorney and determined that the entity may lose the case. The attorney estimated that there is a 50% chance of losing. If this is the case, the attorney estimated that the amount of any payment would be P5,000,000. What is the required journal entry as a result of this litigation? *

A. Debit litigation expense and credit litigation liability P3,000,000 B. Debit litigation expense and credit litigation liability P2,000,000 C. Debit to litigation expense and credit litigation liability P5,000,000 D. No journal entry is required.