Reference no: EM132829929

Problem 1 - 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.

Problem 2 - On December 31, 2020, Richard, Inc is the plaintiff of a patent infringment over Machu, Inc. according to its legal counsel it is probable that Richard will win the case and claim P200,000 in damages.

1. How should the contingent asset above be accounted for in the 2020 financial statements?

Problem 3 - On December 12, 2020, Machu, Inc. was factory used in processing gold was burned by an employee of Richard, Inc. in retaliation of a patent infringement case. The cost of the factory was P5,000,000, with accumulated depreciation of P3,000,000.

The surrounding town was also affected by the fire. Machu's legal counsel believed that it was probable that P3,500,000 will be paid in damages to the neighborhood.

Machu has a P20,000,000 comprehensive insurance policy, which covers the damages resulting from the fire that broke out. The insurance policy has a P1,000,000 deductible clause.

1. What is the amount of provision that will be presented in the statement of financial position as of December 31, 2020?

2. What is the amount of contingent asset that should be recognized in the statement of financial position as of December 31, 2020?

3. How much should be taken to the statement of comprehensive income as of December 31, 2020?