Reference no: EM132784540

You were assigned to audit the various current liability accounts of Towsdie Corp., a washing machine manufacturer, for the year ended December 31, 2020. Upon your request, the following schedule was furnished to you by the accountant:

Accounts payable P1,250,000
Estimated warranties payable 980,000
Estimated premiums payable 1,400,000
Accrued salaries payable 1,032,056
Provision for litigation cases 3,000,000

Audit notes:

1. The accounts payable include a P240,000 purchase in transit as of December 31 from a supplier under FOB Destination term and a P90,000 debit balance with a supplier resulting from an overpayment.
2. The estimated warranties payable balance was the accrued amount in the previous year. It is the company's policy to carry a three-year warranty on its products against manufacturers defects. Based on past experience, 60% of units sold are ultimately returned for repairs and that warranty costs per unit is at P300. During the current year 12,000 units were sold. Actual warranty cost incurred during the year which was charged to warranty expense was at P1,910,000.
3. The company also has an on-going promotional program whereby each washing machine sold comes with 5 coupons. 25 coupons plus P2,000 shall entitle the customer/distributor a dryer which originally costs P6,000. The dryers can be redeemed 2 years after receipt of the coupons from purchases. The company estimates that 40% of the coupons issued with the washing machines sold will ultimately be presented for the premiums redemption. The balance in the estimated premiums payable account is the accrued liability in the prior year. The beginning inventory of dryers was at 300 units. During the year additional 1,000 dryers were acquired. An inventory of the remaining dryers on hand at year-end places the count at 240 units. The redemption of premiums for the current year were appropriately recorded by the company.
4. During 2020, Towsdie was sued by a competitor for P5,000,000 infringement suit of a trademark. Based on the legal counsel's advise, Towsdie accrued the sum of P3,000,000 as a provision. On February 15, 2021, the Supreme Court decided in favor of the party alleging the infringement and ordered the defendant to pay the aggrieved party a sum of P3,500,000. The financial statements of Towsdie were approved by the BOD for issue on April 15, 2021.
5. The accrued salaries payable include P500,000 liability for compensated absences accrued in the previous year and a P532,056, 10% current year bonus to key officers computed based on an unadjusted net income of P8,132,857 after bonus and after tax (30%) 2,500 days unused vacation leaves from 2019 were forwarded to 2020, from which 1,500 days were exercised. By the end of the current year, additional 3,000 days current year leaves were unused by the employees. Unused leaves can be carried over 2 years, thereafter it shall expire. The company also estimates, as per past experience, that only 80% of the unused leaves will ultimately be exercised. Salary rate in 2019 was at 250 per day while salary rate in 2020 is at P275 per day. Payment of salaries including exercise of leaves were appropriately debited to current year salaries expense.

Problem 1: How much is the correct provision from litigation cases as of December 31, 2020?

a. None
b. 3,000,000
c. 3,250,000
d. 3,500,000

Problem 2: What is the adjusted liability for compensated absences to be included in the accrued salaries as of December 31, 2020?

a. 825,000
b. 880,000
c. 1,080,000
d. 1,100,000