3. Determine the implication of the following independent cases to the December 31, 2020 financial statements as per PAS 37, on Provisions, Contingent Liabilities, and Contingent Assets. Case 1 On December 5, 2020, an employee filed a P3,000,000 lawsuit against Lance Company for damages suffered when one of the company’s equipment malfunctioned in August, 2020. In your inquiry of the company’s legal counsel, the legal counsel expects the company will lose the lawsuit and estimates the losses to be between P500,000 and P1,500,000. The employee has offered to settle the lawsuit out of court for P1,200,000, but Lance Company will not agree to the settlement. Case 2 Lance Company has guaranteed a loan of P2,000,000 of one of its key officers from a bank in 2020. By the time the financial statements of Lance Company were approved for issuance by its BOD, it is clear that the key officer is in financial difficulties and it is probable that Lance Company will meet the guarantee. Case 3 On December 20, 2020, an explosion occurred at Lance Company’s plant causing extensive property damages to adjacent areas. Although no claims had yet been asserted against Lance Company by April 15, 2021, Lance Company’s management and legal counsel believes that it is probable that the company will be liable for damages, and that P2.5M would be reasonable estimate of its liability. The legal counsel further opines that the total liability may possibly be up to P5M given the extent of damages to the neighboring areas. Lance Company’s P10M comprehensive public liability policy has a P1M deductible clause. Case 4 On January 12, 2021, a fire at the production area of Lance Company damaged a number of adjacent buildings. Lance Company’s insurance policy does not cover damages to property of others. The adjacent neighbors have filed a P2M damages suit against the company and the legal counsel opines that it is probable that such damages will be awarded to them. Case 1 Case 2 Case 3 Case 4 21 a. Accrue liability at Disclose contingency Accrue liability at Accrue liability at P1,200,000 at P2,000,000 P1,500,000 P2,000,000 b. Accrue liability at Disclose contingency Accrue liability at Disclose contingency P1,000,000 at P2,000,000 P1,000,000 at P2,000,000 c. Accrue liability at Accrue liability at Accrue liability at Disclose contingency P1,000,000 P2,000,000 P1,000,000 at P2,000,000 d. Accrue liability at Accrue liability at Accrue liability at Accrue liability at P1,000,000 P2,000,000 P1,500,000 P2,000,000
3. Determine the implication of the following independent cases to the December 31, 2020
financial statements as per PAS 37, on Provisions,
Assets.
Case 1
On December 5, 2020, an employee filed a P3,000,000 lawsuit against Lance Company for
damages suffered when one of the company’s equipment malfunctioned in August, 2020.
In your inquiry of the company’s legal counsel, the legal counsel expects the company will
lose the lawsuit and estimates the losses to be between P500,000 and P1,500,000. The
employee has offered to settle the lawsuit out of court for P1,200,000, but Lance Company
will not agree to the settlement.
Case 2
Lance Company has guaranteed a loan of P2,000,000 of one of its key officers from a bank
in 2020. By the time the financial statements of Lance Company were approved for
issuance by its BOD, it is clear that the key officer is in financial difficulties and it is probable
that Lance Company will meet the guarantee.
Case 3
On December 20, 2020, an explosion occurred at Lance Company’s plant causing extensive
property damages to adjacent areas. Although no claims had yet been asserted against
Lance Company by April 15, 2021, Lance Company’s management and legal counsel
believes that it is probable that the company will be liable for damages, and that P2.5M
would be reasonable estimate of its liability. The legal counsel further opines that the total
liability may possibly be up to P5M given the extent of damages to the neighboring areas.
Lance Company’s P10M comprehensive public liability policy has a P1M deductible clause.
Case 4
On January 12, 2021, a fire at the production area of Lance Company damaged a number of
adjacent buildings. Lance Company’s insurance policy does not cover damages to property
of others. The adjacent neighbors have filed a P2M damages suit against the company and
the legal counsel opines that it is probable that such damages will be awarded to them.
Case 1 Case 2 Case 3 Case 4
21
a. Accrue liability at Disclose contingency Accrue liability at Accrue liability at
P1,200,000 at P2,000,000 P1,500,000 P2,000,000
b. Accrue liability at Disclose contingency Accrue liability at Disclose contingency
P1,000,000 at P2,000,000 P1,000,000 at P2,000,000
c. Accrue liability at Accrue liability at Accrue liability at Disclose contingency
P1,000,000 P2,000,000 P1,000,000 at P2,000,000
d. Accrue liability at Accrue liability at Accrue liability at Accrue liability at
P1,000,000 P2,000,000 P1,500,000 P2,000,000
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