1. On December 2, 2011, an employee filed a P3,000,000 lawsuit against Cruiser Company for damages suffered when one of Cruiser’s plants exploded on July 20, 2011. Cruiser’s legal counsel expects the company will lose the lawsuit and estimates the loss to be between P500,000 and P1,000,000. The employee has offered to settle the lawsuit out of court for P900,000, but Cruiser will not agree to the settlement. In its December 31, 2011 statement of financial position, what amount should Cruiser Company report as provision from lawsuit? Answer: P750,000
2. A truck owned and operated by Ward Company was involved in an accident with an auto driven by Stallman on January 12, 2011. Ward Company received notice on April 24, 2011 of a lawsuit for P800,000 damages for a personal injury suffered by Stallman. Ward’s counsel believes it is reasonably possible that Stallman will be successful against the company for an estimated amount in the range between P100,000 and P400,000. No amount within this range is a better estimate of potential damages than any other amount. It is expected that the lawsuit will be adjudicated in the latter part of 2012. What amount of loss should Ward accrue at December 31, 2011? Answer: None
3. In May 2011, West Company filed suit against Brown, Inc. seeking P850,000 damages for patent infringement. A court verdict in November 2011 awarded West P600,000 in damages, but Brown’s appeal is not expected to be decided before 2011. West’s counsel believes it is probable but not virtually certain that West will be successful against Brown for an estimated amount in the range between P300,000 and P450,000, with P400,000 considered the most likely amount. What amount should West record as a contingent asset from lawsuit in the year ended December 31, 2011? Answer: None
4. On December 17, 2011, an explosion occurred at Cord Company plant causing extensive property damage to area buildings. Although no claims had yet been assured against Cord Company by March 10, 2012, Cord’s management and counsel concluded that it is reasonably possible. Cord will be responsible for damages, and that P2,500,000 would be reasonable estimate of its liability. Cord’s P10,000,000 comprehensive public liability policy has a P500,000 deductible clause. In Cord’s December 31, 2011 financial statements, which were issued on March 25, 2012, how should this item be reported?
Answer: As a footnote disclosure indicating the possible loss of P500,000
5. On December 31, 2011, Home Company was a defendant in a pending lawsuit. The suit arose from the alleged defect of a product that Home sold in 2010. In the opinion of Home’s attorney, it is probable that Home will have to pay P500,000 and it is reasonably possible that Home will have to pay P600,000 as a result of this lawsuit. In its 2011 financial statements, Home should report: Answer: An accrued liability of P500,000 and would disclose a contingent liability of an additional P100,000
6. In November 2011, attorneys for current and former employees of Mecum, Inc. filed a P3,000,000 class action lawsuit, alleging that exposure to radiation has caused significant medical problems. Attorneys for Mecum are uncertain as to the outcome of the case. However, similar lawsuits against other firms in the same industry have resulted in significant payment by the employer but there was no reliable estimated as to the amount. In Mecum’s December 31,2012 financial statements, which were issued on April 30,2013, how should this item be reported? Answer: If the amount of payment can be estimated, a liability should be recognized, if the amount of expected payment cannot be estimated, only a note disclosure would be required.
7. On January 12, 2012, a fire at a production facility damaged a number of adjacent buildings (owned by other businesses). Coral Company’s’ insurance policy does not cover damage to the property of others. Insurance companies for those...