Problem:

Western Company has several contingent liabilities on December 31, 2020. The auditor

obtained the following brief description of each liability. In June 2020, Western Company

became involved in litigation. In December 2020, the court assessed a judgement for

P2,000,000 against Western Company. The entity is appealing the amount of the

judgement. The entity's attorney believed it is probable that they can reduce the

assessment on appeal by 50%.

In August 2020, Pasig City brought action against Western Company for polluting the

river with its waste products. It is probable that Pasig City will be successful but the

amount of damages Western might have to pay should not exceed P3,000,000.

1. What total amount should be accrued as provision on December 31,2020?

a. 3,000,000

b. 5,000,000

c. 2,000,000

d. 4,000,000

Problem:

In August 2020, ABC Company filed suit against CBA Company seeking 4,000,000

damages for patent infringement. A court verdict in November 2020 awarded ABC

Company P2,000,000 in damages, bur CBA's appeal is not expected to be decided

before 2021. ABC's counsel believed it is probable that ABC will be successful against

CBA for an estimated amount in the range of 500,000 and 1,500,000, with 1,000,000

considered the most likely amount.

2. What amount should ABC record as income from the lawsuit for the year ended

December 31,2020?

a. Zero

b. 1,000,000

c. 2,000,000

d. 1,500,000

Problem:

Mercedes Company issued P 10,000,000 face value 12% convertible bonds at 110 on

January 1,2020, maturing on January 1, 2025 and paying interest semiannually on

January 1 and July 1. It is estimated the bonds would sell only 105 without the

conversion feature. Each P1,000 bond is convertible into 10 ordinary shares with P100

par value.

3. What is the increase in shareholders equity arising from the issuance of the

convertible bonds on January 1,2020?

a. 350,000

b. 500,000

c. 1,000,000

d. Zero

4. What would be the entry to record the issuance of the bonds payable?

a. Cash 11,000,000

Bonds Payable 10,000,000

Premium bonds payable 500,000

Share premium-conversion privilege 500,000

b. Cash 11,000,000

Bonds Payable 10,000,000

Premium bonds payable 650,000

Share premium-conversion privilege 350,000

c. Cash 11,000,000

Bonds Payable 10,000,000

Premium bonds payable 350,000

Share premium-conversion privilege 650,000

d. Cash 11,000,000

Bonds Payable 10,000,000

Premium bonds payable 1,000,000

Problem:

Maryland Company purchased equipment for 2,000,000 on January 1,2020 with a useful

life of 5 years and a residual value of 500,000 using the straight-line method for financial

statement purposes. Depreciation was P300,000 for 2020 and P200,000 for 2021 for tax

purposes. Income before tax and depreciation was P3,000,000 during 2021 and the tax

rate was 25%. During 2021 the entity made an estimated tax payment of 200,000.

5. What is the income tax payable on December 31,2021?

a. 640,000

b. 500,000

c. 450,000

d. 675,000

6. What would be the total amount of income tax expense that is reported in the 2021

income statement?

a. 675,000

b. 500,00

c. 475,000

d. 640,000