Reference no: EM132829043

Problem 1 - Gerbs, Inc. sells calculators that carry a one-year warranty against manufacturer's defects. Based on company experience, warranty costs are estimated at P300 per calculator. During 2020, Gerbs sales amounted to P3,000,000 and paid warranty costs amounting to P245,000. Gerbs estimates that 80% of these calculators will be returned due to defects. Each calculators was sold for P200.

1. How much is the warranty liability?

2. How much is the warranty expense during the period?

Problem 2 - On December 26, 2020, Jerome Company was a defendant in a pending lawsuit. The suit arose from the breach of contract between Jerome and Rose Company during 2020. Based on Jerome's legal counsel it is reasonably possible that Jerome will have to pay P300,000 worth of damages. On February 14, 2021, the suit was settled out of court by Jerome and Rose amounting to P250,000.

1. How should the provision be accounted for in the financial statements?

Problem 3 - On January 1, 2020 Machu, Inc. acquired mining rights near Cordillera for P20,000,000 for 10 years. Since the Company's inception in 1956, the Company continued to restore the lands affected by its mining activities. Management Expects restoration costs to be P2,000,000. The relevant discount rate is 10%.

On December 21, 2020, Machu was being sued by one of another corporation over a patent infringement. The Company's legal counsel finds it probable that Machu will be liable for P2,00,000 damages.

1. Machu, Inc. has a legal obligation on its restoration costs. TRUE/FALSE.

2. How much is the provision for litigation as of December 31, 2020?

3. Compute the amount of expense that Machu, Inc. should recognize as at December 31, 2020.