Problem 4: Contingent Liability

On the situation below determine whether the liability is provision or not. Write Provision if it be recognized a liability and their corresponding amount. If not be recognized as a liability, write not provision.

(please show a solution)

1. In May 2019, E Company became involved in litigation. In December 2019, the court assessed a judgment for P1,600,000 against E Company. The entity is appealing the amount of the judgment. The attorneys believed it is probable that the assessment can be reduced on appeal by 50%. The appeal is expected to take at least a year._____________________

2. In July 2019 Cebu City brought action against E Company for polluting the river with its waste products. It is probable that Cebu City will be successful but the amount of damages the entity might have to pay should not exceed P1,500,000.________________________

3. E Company has signed as guarantor for a P1,000,000 loan by First Bank to N Company a principal supplier to E Company. At this time, there is only a remote likelihood that E Company will have to make payment on Behalf of N Company._________________________

4. E Company has long owned a manufacturing site that has now been discovered to be contaminated with toxic waste. The entity has acknowledged its responsibility for the contamination. An initial clean up feasibility study has shown that it will cost at least P500,000 to clean up the toxic waste._________________________

5. E Company has been sued for patent infringement and lost the case. A preliminary judgement of P300,000 was issued and is under legal appeal. The entity attorneys agree that it is probable that the entity will lose this appeal.____________________

6. No customer accounts have been shown to be uncollectible as yet but E Company estimated that 3% of credit sales will eventually prove uncollectible. Credit sales amounted P30,000,000 for 2019. _______________________

7. E Company offers a two-year warranty against manufacturers defect for all its products. Industry experience indicates that warranty costs will approximately 2% of credit sales. Actual warranty paid totalled P350,000. ___________________________

8. E Company is involved in a lawsuit resulting from a dispute with a customer. On January 2020, judgment was rendered against E Company in the amount of P1,500,000 plus interest of P300,000. E Company plans to appeal the judgment and is unable to predict its outcome though it is not expected to have a material adverse effect on the entity._______________________