PROBLEM 17: You are engaged to audit the December 31, 2012, financial statements of LIZA COMPANY, a manufacturer of household appliances. Your audit disclosed the following situations. a. In June 2012, the company began producing and selling a new line of dishwasher. By the end of the year, it had sold 120,000 to various dealers for P15,000 each. The product was sold under a l-year warranty, and the company estimates warranty costs to be P750 per dishwasher. Liza had paid out P30 million in warranty expenses as of December 31, 2012, which also the amount shown as warranty expense in its income statement for the current year. b. In response to your letter of audit inquiry, Liza's lawyer informed you that the company is involved in a lawsuit for violation environmental laws regulating hazardous waste. Although the litigation is pending, Liza's lawyer is certain that Liza will most probably have to pay cleanup costs and fines of P5,500,000. Liza neither accrued nor disclosed this loss in the financial statements. c. Liza is the defendant in a patent infringement suit by Mona Bang over Liza's use of a hydraulic compressor in several of its manufactured appliances. Liza's lawyer informed you that if the suit goes against your audit client, the loss may be as much as P10 millian. However, the lawyer believes that the loss of this suit is only possible. Liza did not in any way disclose this pending litigation in its financial statements. 1. What amount of warranty expense should be shown on Liza's income statement for the year ended December 31, 2012? A. P30,000,000 B. PO 2. What amount of warranty liability should be shown on Liza's statement of financial position as of December 31, 2012? A. P60,000,000 B. P90,000,000 3. What amount of lawsuit liability should be reported as a provision on Liza's December 31, 2012, statement of financial position? A. P10,000,000 B. P5,500,000 C. P60,000,000 D. P90,000,000 C. P30,000,000 D. PO C. P15,500,000 D. PO
PROBLEM 17: You are engaged to audit the December 31, 2012, financial statements of LIZA COMPANY, a manufacturer of household appliances. Your audit disclosed the following situations. a. In June 2012, the company began producing and selling a new line of dishwasher. By the end of the year, it had sold 120,000 to various dealers for P15,000 each. The product was sold under a l-year warranty, and the company estimates warranty costs to be P750 per dishwasher. Liza had paid out P30 million in warranty expenses as of December 31, 2012, which also the amount shown as warranty expense in its income statement for the current year. b. In response to your letter of audit inquiry, Liza's lawyer informed you that the company is involved in a lawsuit for violation environmental laws regulating hazardous waste. Although the litigation is pending, Liza's lawyer is certain that Liza will most probably have to pay cleanup costs and fines of P5,500,000. Liza neither accrued nor disclosed this loss in the financial statements. c. Liza is the defendant in a patent infringement suit by Mona Bang over Liza's use of a hydraulic compressor in several of its manufactured appliances. Liza's lawyer informed you that if the suit goes against your audit client, the loss may be as much as P10 millian. However, the lawyer believes that the loss of this suit is only possible. Liza did not in any way disclose this pending litigation in its financial statements. 1. What amount of warranty expense should be shown on Liza's income statement for the year ended December 31, 2012? A. P30,000,000 B. PO 2. What amount of warranty liability should be shown on Liza's statement of financial position as of December 31, 2012? A. P60,000,000 B. P90,000,000 3. What amount of lawsuit liability should be reported as a provision on Liza's December 31, 2012, statement of financial position? A. P10,000,000 B. P5,500,000 C. P60,000,000 D. P90,000,000 C. P30,000,000 D. PO C. P15,500,000 D. PO
Financial Accounting: The Impact on Decision Makers
10th Edition
ISBN:9781305654174
Author:Gary A. Porter, Curtis L. Norton
Publisher:Gary A. Porter, Curtis L. Norton
Chapter9: Current Liabilities, Contingencies, And The Time Value Of Money
Section: Chapter Questions
Problem 9.5AP
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Transcribed Image Text:PROBLEM 17:
You are engaged to audit the December 31, 2012, financial statements of LIZA COMPANY, a
manufacturer of household appliances. Your audit disclosed the following situations.
a. In June 2012, the company began producing and selling a new line of dishwasher. By the
end of the year, it had sold 120,000 to various dealers for P15,000 each. The product
was sold under a l-year warranty, and the company estimates warranty costs to be
P750 per dishwasher. Liza had paid out P30 million in warranty expenses as of
December 31, 2012, which also the amount shown as warranty expense in its income
statement for the current year.
b. In response to your letter of audit inquiry, Liza's lawyer informed you that the company
is involved in a lawsuit for violation environmental laws regulating hazardous waste.
Although the litigation is pending, Liza's lawyer is certain that Liza will most probably
have to pay cleanup costs and fines of P5,500,000. Liza neither accrued nor disclosed
this loss in the financial statements.
c. Liza is the defendant in a patent infringement suit by Mona Bang over Liza's use of a
hydraulic compressor in several of its manufactured appliances. Liza's lawyer informed
you that if the suit goes against your audit client, the loss may be as much as P10
million. However, the lawyer believes that the loss of this suit is only possible. Liza did
not in any way disclose this pending litigation in its financial statements.
1. What amount of warranty expense should be shown on Liza's income statement for the
year ended December 31, 2012?
A. P30,000,000
C. P60,000,000
D. P90,000,000
B. PO
2. What amount af warranty liability should be shown on Liza's statement of financial positian
as of December 31, 2012?
A. P60,000,000
B. P90,000,000
C. P30,000,000
D. PO
3. What amount of lawsuit liability should be reported as a provision on Liza's December 31,
2012, statement of financial position?
A. P10,000,000
B. P5,500,000
C. P15,500,000
D. PO
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