1. How are provisions distinguished from contingent liabilities?

Provision is a liability whose existence as of the reporting date is certain because it meets the
definition of a liability but is uncertain as to timing or amount. While a contingent liability is a liability
that may occur depending on the outcome of an uncertain future event.

Provision – page 2

Contingent liability - https://www.investopedia.com/terms/c/contingentliability.asp

2. Give examples of provisions.

Examples of provisions are accruals, asset impairments, bad debts, depreciation, doubtful debts,
income taxes, inventory obsolesces, pension, restructuring liabilities and sales allowances.

https://www.freshbooks.com/hub/accounting/provisions-accounting

3. Differentiate a provision from a contingent liability.

Provision is a liability of uncertain timing or amount. It is recognized as a liability on the face of

statement of financial position presented separately under liabilities. On the other hand, contingent
liability is either (a) a possible obligation that arises from past events and whose existence will be
confirmed only by the occurrence or non-occurrence of one or more future events and (b) a present
obligation that arises from past events but is not recognized because it is not probable that an outflow
of resources embodying economic benefits will be required to settle the obligation and the amount of
obligation cannot be measured reliably. It is not recognized as a liability on the face of statement of the
statement of financial position and it is only disclosed in the notes to the financial statements.

Robles, page 4.

4. When the provision being measured involves a large population of items, how is the amount of the
obligation estimated?

When the provision being measured involves a large population of items, the obligation is
estimated by weighing all possible outcomes by their associated possibilities (statistical method called
“expected value).

Robles, page 6

5. How are provisions measured if there is continuous range of possible outcomes and each range is as
likely as the other?

When there is a continuous range of possible outcomes, and each point in that range is as likely
as any other, the midpoint of the range is used.

Robles, page 6

6. Cite examples that could give rise to a contingent liability.

Examples of contingent liabilities are pending litigation (legal action), warranties, customer
insurance claims, and bankruptcy. Pending litigation involves legal claims against the business that may
be resolved at a future point in time. The outcome of the lawsuit has yet to be determined but could
have negative future impact on the business. Warranties arise from products or services sold to
customers that cover certain defects. It is unclear if a customer will need to use a warranty, and when,
but this is a possibility for each product or service sold that includes a warranty. The same idea applies
to insurance claims (car, life, and fire, for example), and bankruptcy.

https://opentextbc.ca/principlesofaccountingv1openstax/chapter/define-and-apply-accounting-
treatment-for-contingent-liabilities/

7. What is the accounting treatment for a contingent liability?

Qualifying contingent liabilities are recorded as an expense on the income statement and a
liability on the balance sheet. If the contingent loss is remote, meaning it has less than a 50% chance of
occurring, the liability should not be reflected on the balance sheet. Any contingent liabilities that are
questionable before their value can be determined should be disclosed in the footnotes to the financial
statements.

http://investopedia.com/ask/answers/042415/how-are-contingent-liabilities-reflected-balance-
sheet.asp#:~:text=Qualifying%20contingent%20liabilities%20are%20recorded,reflected%20on%20the
%20balance%20sheet.

8. Describe the different bases for the computation of bonuses to key employees and officers of an
entity.

a. Bonus is based on profit before deducting bonus and income tax.

b. Bonus is based on profit after deducting bonus and before deducting income tax.

c. Bonus is based on profit before deducting bonus and after deducting income tax.

d. Bonus is based on profit after deducting both bonus and income tax.

Robles, page 9 and 10

9. Discuss the accounting treatment for the following:

a. coupons, discount vouchers and other customer loyalty awards

b. warranties that provide assurance that products will function as intended based on agreed upon
specifications.

If the warranties provide assurance that the products will function as intended based on agreed-
upon specifications, the warranty shall be accounted for in accordance with IAS 37 Provisions,
Contingent Liabilities and Contingent Assets. Warranty expense is recognized based on associating cause
and effect.

(ewan kung sasama pa to?) To properly measure an enterprise’s profit for the period, the
expected costs related to revenues of the period shall be recognized as expenses in the same period in
which sales are recorded, even if the expenditure is to be incurred at a subsequent period.

Robles. Pages 12-13

c. warranties that provide service other than agreed-upon specifications or when customers are given
the option to purchase the warranties.

(di ko sure) If the customers are given the option to purchase the warranties separately, or the
warranties provide service other than agreed-upon specifications, the warranty is a distinct service and
is considered a performance obligation and the transaction price for the sale of the product must be
allocated between the sales price of the product without the warranty and the performance obligation
for the warranty.

Robles, page 13.

d. gift certificates

10. When are dividends recognized as liabilities? What types of dividends result in recognition of
liabilities?

Dividends are recognized as liabilities when it is declared. This means that the company owes its
shareholders money but has not yet paid. Cash dividends, property dividends, share dividends, scrip
dividends and liquidating dividends are the types of dividends which result in recognition of liabilities.

http://investopedia.com/ask/answers/091115/are-dividends-considered-asset.asp#:~:text=For
%20Companies%2C%20Dividends%20Are%20Liabilities&text=When%20a%20dividend%20is
%20declared,but%20has%20not%20yet%20paid.

Robles, pages 106-113

11. What are contingent assets? Give examples of transactions that give rise to a contingent asset?

Contingent asset is a probable asset that arises from past events and whose existence will be
confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly
within the control of the enterprise. One example that may give rise to a contingent asset is a claim that
an enterprise is pursuing through legal processes, where the outcome is uncertain. Another, when a
company is involved in a lawsuit with the expectation to receive compensation, that company has a
contingent asset because the outcome of the case is not yet known, and the dollar amount is yet to be
determined.

Robles, p. 28

https://www.investopedia.com/terms/c/contingentasset.asp

Free for she hihi:

Example of Contingent Asset

An example of a contingent asset (and its related contingent gain) is a lawsuit filed by Company A
against a competitor for infringing on Company A's patent. Even if it is probable (but not certain) that
Company A will win the lawsuit, it is a contingent asset and a contingent gain. As such, it will not be
recorded in Company A's general ledger accounts until the lawsuit is settled. (At most, Company A could
prepare a carefully worded disclosure stating that it has filed the lawsuit, but the outcome is uncertain.)
https://www.accountingcoach.com/blog/contingent-asset-contingent-gain

12. Give instances when a contingent asset is appropriately subsequently recognized in the financial
assets.

Contingent asset is appropriately subsequently recognized in the financial assets when the
realization of income is virtually certain, the related asset is not a contingency anymore and its
recognition is appropriate. A contingent asset becomes a realized asset recordable on the balance sheet
when the realization of cash flows associated with it becomes relatively certain.

Robles, p. 28

https://www.investopedia.com/terms/c/contingentasset.asp

Problems.

Problem 1:

Case 1. No recognized liability because it is a contingent liability. P0.

Case 2. P800,000.

Case 3. (P300,000 + P500,000 = P800,000) (P800,000/2 = P400,000).

Case 4. P350,000.

Case 5. P1,000,000 x 10% = P100,000

P200,000 x 30% = P60,000

P100,000 + P60,000 = P160,000

P160,000 – P60,000 = P100,000.

Journal Entries:

Warranty Expense P160,000

Liability for Warranty P160,000

Liability for Warranty P60,000

Cash, etc. P60,000

Case 6. P0??? Contingent liability??

Problem 2:

a. Bonus is 8% of profit before deduction for both bonus and income taxes.

B = .08 x P8,000,000 = P640,000.

b. Bonus is 8% of profit after deduction for bonus but before deduction for income taxes.

B = .08 (P8,000,000 – B)

B = P640,000 - .08B

B = P640,000/1.08 = P592,592.592592 or P592,593???

c. Bonus is 8% of profit before deduction for bonus but after deduction for income taxes.

B = .08 (P8,000,000 – T)

T = .30 (P8,000,000 – B)

B = .08 [P8,000,000 - .30 (P8,000,000 – B)]

B = .08 (P8,000,000 – P2,400,000 + .30B)

B = P448,000 + .024B

B = P448,000/0.976 = P459,016.393442 or P459,016???

d. Bonus is 8% of profit after deduction for both bonus and income taxes.

B = .08 (P8,000,000 – B – T)

T = .30 (P8,000,000 – B)

B = .08 [P8,000,000 – B - .30 (P8,000,000 – B)]

B = .08 (P8,000,000 – B – P2,400,000 + .30B)

B = P448,000 - .056B

B = P448,000/1.056 = P424,242.

Problem 3:

a. The sales manager gets 8% and each sales agent gets 6% of profit before tax and bonuses.

Bonus to sales manager = .08 x P3,000,000 = P240,000.

Bonus to each sales agent = .06 x P3,000,000 = P180,000

Or P180,000 x 2 = P360,000.

b. Each bonus is 12% of profit after income tax and bonuses.

Bonus = 36%???

B = .36 (P3,000,000 – B – T)

T = .30 (P3,000,000 – B)

B = .36 [P3,000,000 – B - .30 (P3,000,000 – B)]

 B = .36 (P3,000,000 – B – P900,000 + .30B)

B = P756,000 – .252B

B = P756,000/1.252 = P603,833.865814 total? Each = P603,834/3 =P201,278.

c. Sales manager gets 12% and each sales agent gets 10% of profit after bonuses but before income tax.

Sales manager = 12%

B = .12 x (P3,000,000 – B)

B = P360,000 – .12B

B = P360,000/1.12 = P321,428.571428 or P321,429.

Each sales agent = 10%

B = .10 x (P3,000,000 – B)

B = P300,000 – .10B

B = P300,000/1.10 = P272,727.272727 or P272,727.

Problem 4:

B = .06 (P9,000,000 – B – T)

T = .30 (P9,000,000 – B)

B = .06 [P9,000,000 – B - .30 (P9,000,000 – B)]

B = .06 (P9,000,000 – B – P2,700,000 + .30B)

B = P378,000 - .042B

B = P378,000/1.042 = P362,763.915547 or P362,764

T = .30 (P9,000,000 – P362,764) = P2,591,170.8 or P2,591,171.

Problem 5:

2019:

Cash (1,000 x P720) P720,000

Unearned Revenue from Warranty Contracts P720,000

Cost of Warranty Contracts P25,000

Cash, Materials, etc. P25,000

 Unearned Revenue from Warranty Contracts P72,000

Revenue from Warranty Contracts P72,000

P720,000 x ½ x 20%

2020:

Cash (1,200 x P720) P864,000

Unearned Revenue from Warranty Contracts P864,000

Cost of Warranty Contracts P100,000

Cash, Materials, etc. P100,000