Reference no: EM133190084

Question 1 - Bergify Corp. has entered into a lease arrangement with Foodie Ltd. in which it has agreed to lease an item of machinery from Foodie Ltd. on the following terms:

Date of commencement of lease - July 1, 2022

Duration of lease - 8 years

Implicit rate of interest - 6%

Initial up-front payment - P200,000

Lease payments at the end of each year - P100,000

The lease is considered non-cancellable. The economic life of the machinery is 10 years. However, Bergify Corp. will return the machinery to Foodie Ltd. at the end of the lease term. At this stage it is expected that the machinery will have a residual unguaranteed value of P80,000 at the end of the lease term. The company uses straight line method. (Round off the PV factor to four decimal places)

Required - How much is the carrying value of the right of use assets on July 1, 2022?

Question 2 - An entity is the defendant in a patent infringement lawsuit. The entity's lawyers believe there is a 30% chance that the court will dismiss the case and the entity will incur no outflow of economic benefits. However, if the court rules in favor of the claimant, the lawyers believe that there is a 20% chance that the entity will be required to pay damages of P800,000 (the amount sought by the claimant) and an 80% chance that the entity will be required to pay damages of P400,000 (the amount that was recently awarded by the same judge in a similar case). Other outcomes are unlikely. The court is expected to rule in late December 2022. There is no indication that the claimant will settle out of court. A 7% risk adjustment factor to the probability-weighted expected cash flows is considered appropriate to reflect the uncertainties in the cash flow estimates. An appropriate discount rate is 10% per year.

Required - How much is the provision for lawsuit at December 31, 2021?

A. P436,360

B. P446,908

C. P326,836

D. P0