Reference no: EM133174088
Question 1 - M Company gives warranties at the time of sale to purchasers of its product. Under the terms of the sale, the entity undertakes to make good, by repair or replacement, manufacturing defects that become apparent within one year from the date of sale.
On December 31, 2021, the entity appropriately recognize P50,000 warranty liability. During 2022, the entity incurred and charged P140,000 against the warranty liability. Out of the P140,000, an amount of P80,000 related to warranties for sales made in 2022.
The increase during 2022 in the discounted amount recognized as a warranty liability on December 31, 2021 arising from the passage of time is P5,000. On December 31, 2022, the entity estimated that it would incur the following expenditures in 2023 to meet its warranty obligations on December 31, 2022: 5% probability of P400,000 20% probability of P200,000 50% probability of P80,000 25% probability of P20,000
Assume for simplicity that the 2023 cash flows for warranty repairs and replacements take place on December 31, 2023. An appropriate discount rate is 10% per year. The PV of 1 at 10% for one year is 0.91.
An appropriate risk adjustment factor to reflect the uncertainties in the cash flow estimates is an increment of 20% to the probability-weighted expected cash flows.
1. What is the amount of undiscounted cash flows for warranty on December 31, 2022 disregarding the risk adjustment factor?
a. 100,000 c. 105,000
b. 200,000 d. 350,000
2. What is the amount of undiscounted cash flows for warranty after considering the risk adjustment factor?
a. 266,000 c. 211,000
b. 126,000 d. 120,000
3. What amount should be reported as warranty liability on December 31, 2022?
a. 187,460 c. 114,660
b. 242,060 d. 126,000
4. What amount should be recognized as warranty expense for 2022?
a. 199,660 c. 211,000
b. 194,660 d. 206,000
Question 2 - On January 1, 2022, N Company borrowed P500,000 8%, interest-bearing note due in four years. The present value of the note on January 1, 2022 was P367,500. The entity has elected the fair value option for reporting the financial liability. On December 31, 2022, the fair value of the note is P408,150.
1. What is the carrying amount of the note payable on December 31, 2022?
a. 367,500 c. 460,000
b. 500,000 d. 408,150
2. What amount should be reported as interest expense for 2022?
a. 32,562 c. 40,000
b. 20,000 d. 29,400
3. What amount should be reported as net gain from change in fair value in 2022?
a. 91,850 c. 132,500
b. 0 d. 40,650
4. At what amount should the discount on note payable be presented on December 31, 2022?
a. 100,000 c. 132,500
b. 0 d. 103,100
Question 3 - For a liability to exist,
a. The exact amount must be known.
b. An obligation to pay cash in the future must exist.
c. A past transaction or event must have occurred.
d. The identity of the party owed must be known.
Question 4 - An entity operates a plant in a foreign country. It is probable that the plant will be expropriated. However, the foreign government has indicated that the entity will receive a definite amount of compensation for the plant. The amount of compensation is less than the fair value but exceeds the carrying amount of the plant. The contingent asset should be reported
a. In the notes to financial statements
b. As a valuation allowance as a part of shareholders' equity
c. In the statement of financial position
d. As a fixed asset valuation allowance account