INTERMEDIATE ACCOUNTING 2 1st Semester, SY 2022-2023

Learning Material 4
PROVISION: Contingent Liability

A. Discussion of Accounting Principles

1. Provision
a. It is an existing liability of uncertain timing or uncertain amount; and
b. Its essence is uncertainty about the timing or amount of the future expenditure.

Its being uncertain distinguishes a provision from other liabilities. The liability definitely
exists at the end of the reporting period but the amount is indefinite or the date when the
obligation is due is also indefinite, and in some cases, the payee cannot be identified or
determined.

A provision is the equivalent of an estimated liability or a loss contingency that is

accrued because it is both probable and measurable.

2. Recognition of Provision
PAS 37, paragraph 14, provides that a provision shall be recognized as a liability in the financial
statements under the following conditions:

a. The entity has a present obligation, legal or constructive, as a result of a past event.
b. It is probable that an outflow of resources embodying economic benefits would be required to
settle the obligation.
c. The amount of the obligation can be measured reliably.

3. Present Obligation
 May be legal or constructive.
 A legal obligation arises from a contract, legislation or other operation of law.
 A constructive obligation is derived from an entity’s actions where:
a. The entity has indicated to other parties that it will accept certain responsibilities by reason of
an established pattern of past practice, published policy, or a sufficiently specific current
statement.
b. As a result, the entity has created a valid expectation on the part of other parties that it will
discharge those responsibilities.

A constructive obligation exists when the entity from an established pattern of practice or
stated policy has created a valid expectation that it will accept certain responsibilities.

4. Past Event
 The past event that leads to a present obligation is called an obligating event.
 An accounting provision cannot be created in anticipation of a future event.
The event must have already occurred which gives rise to the legal or constructive
obligation.

An obligating event is an event that creates a legal or constructive obligation because the
entity has no realistic alternative but to settle the obligation created by the event.

 The obligating event is a case where:

a. The settlement of the obligation can be enforced by law.
b. The event creates valid expectations on the part of other parties that the entity will discharge
the obligation, as in the case of a constructive obligation.

5. Probable Outflow of Economic Benefits

a. For a provision to qualify for recognition, there must be not only a present obligation but also a
probable outflow of resources embodying economic benefits to settle the obligation.
b. An outflow of resources is regarded as probable if the event is more likely than not to occur; that is,
the probability that the event will occur is greater than the probability that it will not occur.
c. As a rule of thumb, probable means more than 50% likely or substantially more.
Possible means 50% or less likely to occur.
Remote means 10% or less likely to occur or very slight occurrence.
6. Reliable Estimate
a. The use of estimates is an essential part of the preparation of financial statements and does not
undermine their reliability (PAS 37, paragraph 25). This is essentially true in the case of provision
because by nature, a provision is more uncertain than most items in the statement of financial
position.

b. The standard suggests that by using a range of possible outcomes, an entity usually would be able
to make an estimate of the obligation that is sufficiently reliable.
Where no reliable estimate can be made, no liability is recognized.
7. Measurement of Provision
a. The amount recognized as a provision should be the best estimate of the expenditure required to
settle the present obligation at the end of reporting period.

b. The best estimate is the amount that an entity would rationally pay to settle the obligation at the
end of reporting period or to transfer it to a third party at that time.

c. Where a single obligation is being measured, the individual most likely outcome adjusted for the
effect of other possible outcomes may be the best estimate.

d. Where there is a continuous range of possible outcomes and each point in the range is as likely as
any other, the midpoint of the range is used.

e. Where the provision being measured involves a large population of items, the obligation is
estimated by “weighting” all possible outcomes by their associated possibilities. The name of this
statistical method of estimation is “expected value”.

8. Other Measurement Consideration

Items that are taken into consideration in recognizing and measuring a provision:
a. Risks and uncertainties
b. Present value of obligation
c. Future events
d. Expected disposal of assets
e. Reimbursements
f. Changes in provision
g. Use of provision
h. Future operating losses
i. Onerous contract

9. Risks and Uncertainties

a. The risks and uncertainties that inevitably surround events and circumstances shall be taken into
account in reaching the best estimate of a provision.

b. Risk describes variability of outcomes.

c. A risk adjustment may increase the amount at which a liability is measured.

d. As prudence dictates, caution is needed in making judgment under conditions of uncertainty so that
income and assets are not overstated, or expenses and liabilities are not understated.

e. Caution, uncertainty does not justify the creation of excessive provision or a deliberate
overstatement of liabilities.

10. Present Value of Obligation

a. Where the effect of the time value of money is material, the amount of provision shall be the
present value of the expenditure expected to settle the obligation.

b. The discount rate should be a pretax rate that reflects the current market assessment of the time
value of money and the risk specific to the liability.

c. The discount rate should not reflect the risk for which cash flow estimates have already been
adjusted.

11. Future Events

a. Future events that affect the amount required to settle an obligation shall be reflected in the amount
of a provision where there is a sufficient evidence that they will occur.
 b. These future events include new legislation and changes in technology.

12. Expected Disposal of Assets

a. Gains from expected disposal of assets shall not be taken into account in measuring a provision.

b. An entity shall recognize gain on disposal at the time of the disposition of the assets.

Any cash inflows from disposal are treated separately from the measurement of the provision.

13. Reimbursements
a. The reimbursement shall be recognized when it is virtually certain that reimbursement would be
received if the entity settles the obligation.

b. The reimbursement shall be treated as a separate asset and not netted against the estimated liability
for the provision.

c. The amount of reimbursement shall not exceed the amount of the provision.

d. In the income statement, the expense relating to the provision may be presented net of the
reimbursement.

14. Changes in Provision

a. Provisions shall be reviewed at every end of the reporting period and adjusted to reflect the current
best estimate.

b. The provision shall be reversed if it is no longer probable that an outflow of economic benefits
would be required to settle the obligation.

c. Where discounting is used, the carrying amount of the provision increases each period to reflect the
passage of time.

15. Use of Provision

a. A provision shall be used only for expenditures for which provision was originally recognized.

b. Example, a provision for plant dismantlement cannot be used to absorb environmental pollution
claims or warranty payments.

c. If an expenditure is charged against a provision that was originally recognized for another purpose,
that would camouflage the impact of two different events, thus distorting financial performance
and possibly constituting financial reporting fraud.

16. Future Operating Losses

Provision shall not be recognized for future operating losses.

a. This means that a provision for operating losses is not recognized because a past event creating a
present obligation has not occurred.

b. An expectation of future operating losses is an indication that certain assets may be impaired. An
impairment test for these assets may be necessary.

17. Onerous Contract

a. If an entity has an onerous contract, the present obligation under the contract shall be recognized
and measured as a provision.

b. It is a contract in which the unavoidable costs of meeting the obligation under the contract exceed
the economic benefits expected to be received under it.

c. PAS 37, paragraph 68, mandates that the unavoidable costs under a contract represents the “least
net cost of exiting from the contract”.
d. The lower amount between the cost of fulfilling the contract and the compensation or penalty
arising from failure to fulfill the contract is the least cost of exiting from the contract.

18. Examples of Provision

a. Warranties – The bestv extimate of the warranty cost is recognized as a provision because there is
clear constructive obligation arising from an obligating event which is the sale of the product with
warranty.
 b. Environmental contamination – If an entity has a n environmental policy such that otehr parties
would expect the entity to clean up any contamination, or if the entity has brken current
environmental legislation then a provision for environmental damage shall be made.

The obligating event is the contamination of the property which gives rise to constructive or legal
obligation. A provision is recognized for the best estimate of the cost of cleaning up the
contamination.

c. Decommissioning or abandonment costs – When an oil entity initially purchases an oil field, it is
put under a legal obligation to decommission the site at the end of its life. The costs of
abandonment or decommissioning shall be recognized as a provision and may be capitalized as
cost of the oil field.

d. Court case – After a wedding in the current year, ten people died possibly as a result of food
positioning from products sold by the entity. Legal proceedings are started seeking damages from
the entity.

When the entity prepares the financial statements for the current year, the lawyers advise that
owing to the developments in the case, it is probable that the entity would be found liable. A
provision is recognized for the best estimate of the damages because there is a present obligation.

e. Guarantee – In the current year, an entity gives a guarantee of certain borrowings of another entity.
During the year, the financial condition of the borrower deteriorates and at year-end, the borrower
files a petition for bankruptcy.

A provision is recognized for the best estimate of the guarantee obligation because there is legal
obligation arising from the obligating event which is the guarantee.

19. Restructuring
It is a program that is planned and controlled by management and materially changes either the scope
of a business of an entity or the manner in which that business is conducted (PAS 37, paragraph 10).

Events that may qualify as restructuring are:

a. Sale or termination of a line of business;

b. Closure of business location in a region or relocation of business activities from one location to
another or relocation of headquarters from one country to another;

c. Change in management structure, such as elimination of a layer of management or making all

functional units autonomous; and

d. Fundamental reorganization of an entity that has a material and significant impact on its operations.

20. Provision for Restructuring

Recognition of the provision for restructuring is required because a constructive obligation may arise
from the decision to restructure.

A constructive obligation for restructuring rises when two conditions are present:
1. The entity has a detailed formal plan for the restructuring which includes the following:
a. The business being restructured;
b. The principal location affected;
c. The location, function and approximate number of employees who will be compensated for
terminating their employment;
d. Data when the plan will be implemented; and
e. The expenditures that will be undertaken.

2. The entity has raised valid expectation in the minds of those affected that the entity will carry out
the restructuring by starting to implement the plan and announcing the main features to those
affected by it.

21. Amount of Restructuring Provision

a. A restructuring provision shall include only direct expenditures arising from the restructuring.

b. These expenditures are necessarily incurred for the restructuring and not associated with the
ongoing activities of the entity.
 Example, salaries and benefits of employees to be incurred after operations cease and that are
associated with the closure of the operations shall be included in the amount of the restructuring
provision.

c. PAS 37, paragraph 81, specifically excludes the following expenditures from the restructuring
provision:

1. Cost of retraining or relocating continuing staff.

2. Marketing or advertising program to promote the new company image.
3. Investment in new system and distribution network.

Such expenditures are categorically disallowed as restructuring provisions because

these are considered to be expenses relating to the future conduct of the business
of the entity, and thus are not liabilities relating to the restructuring program.

22. Contingent Liability

Two definitions of contingent liability (see PAS 37, paragraph 10).

1. A contingent liability is a possible obligation that arises from past event and whose existence will
be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not
wholly within the control of the entity.

2. A contingent liability is a present obligation that arises from past event but is not recognized
because it is not probable that an outflow of resources embodying economic benefits will be
required to settle the obligation or the amount of the obligation cannot be measured reliably.

23. Contingent Liability and Provision

a. The second definition states that a contingent liability is a present obligation. However, the present
is either probable or measurable but not both to be considered a contingent liability.

b. If the present obligation is probable and the amount can be measured reliably, the obligation is not
a contingent liability but shall be recognized as a provision.

24. Treatment of Contingent Liability

a. A contingent liability shall not be recognized in the financial statements but shall be disclosed only.
The required disclosures are:

1. Brief description of the nature of the contingent liability.

2. An estimate of it financial effect.
3. An indication of the uncertainties that exist.
4. Possibility of any reimbursement.

b. If a contingent liability is remote, no disclosure is necessary.

25. Contingent Asset

Definitions provided by PAS 37, paragraph 10:

1. A contingent asset is a possible asset that arises from past event and whose existence will be
confirmed only by the occurrence or nonoccurrence of one or more uncertain future events not
wholly within the control of the entity.

2. A contingent asset shall not be recognized because this may result to recognition of income that
may never be realized.

3. When the realization of asset is virtually certain, the related asset is no longer contingent asset and
its recognition is appropriate.

 A contingent asset is only disclosed when it is probable.

 The disclosure includes a brief description of the contingent asset and an estimate of
its financial effects.
 If a contingent asset is only possible or remote, no disclosure is required.

26. Decommissioning Liability

1. It is an obligation to dismantle, remove and restore an item of property, plant and equipment as
required by law or contract.
 2. It is called an asset retirement obligation.

B. Application Exercises

You are provided with exercises and the corresponding solution. The objective is to demonstrate the
application of the accounting principles discussed for premium liability.

Exercise 1

An entity sells goods with a warranty under which customers are covered for the cost of repairs of any
manufacturing defects that become apparent within six months after purchase.

If minor defects are detected in all products sold, repair costs would be about P2,000,000. If major defects
are detected in all products sold, repair costs of P10,000,000 would result.

The entity’s past expeireince and future expectations indicate that 75% of the goods sold will have no
defects, 20% will have minor defects and 5% will have major defects.

Required:
Determine the expected value or cost of repairs.

Solution to Exercise 1

The expected value or cost of repairs is measured as follows:

75% sales None

20% sales (20% x 2,000,000) 400,000
5% sales ( 5% x 10,000,000) 500,000
Total expected value or cost of repairs 900,000

Exercise 2

An entity is a defendant in a patent infringement suit. The lawyers believe that there is a 60% chance that
the court will not dismiss the case and the entity will incur an outflow of future economic benefits.

If the court rules against the entity and in favor of the claimant, the lawyers believe that there is a 30%
chance the entity will be required to pay damage of P2,000,000 and a 70% chance that the damages will be
P1,000,000.

A 10% risk adjustment factor to the probabilities of the expected cash flows is considered appropriate to
reflect the uncertainties in the cash flow estimate.

Required:
Determine the estimated amount of provision.

Solution to Exercise 2

Weighted probabilities:
30% x 2,000,000 x 60% 360,000
70% x 1,000,000 x 60% 420,000
Expected cash outflow 780,000
Risk adjustment factor (10% x 780,000) (78,000)
Estimated amount of provision 702,000
Note: The amount of provision shall be discounted if the effect of the time value of money is material.

Exercise 3

An entity extracts gas and oil in the Philippine Deep. On January 1, 2021, the entity constructed a drilling
platform for P50,000,000 and is required by Philippine law to remove and dismantle the platform at the end
of its useful life of 10 years. The straight line method is used in depreciating the drilling platform.

The entity has estimated that such decommissioning will cost P10,000,000. Based on a 12% discount rate,
the present value of 1 for 10 years is 0.322.

Required: Prepare journal entries for 2021 and 202.

 Solution to Exercise 3

Journal entries for 2021

Jan. 1 Drilling platform [50,000,000 + (10,000,000 x 0.322)] 53,220,000

Cash 50,000,000
Decommissioning liability (10,000,000 x 0.322) 3,220,000

Dec. 31 Depreciation 5,322,000

Accumulated depreciation 5,322,000
(53,220,000/10 years)

31 Interest expense 386,400

Decommissioning liability 386,400
(12% x 3,220,000)

Journal entries for 2022

Dec. 31 Depreciation 5,322,000

Accumulated depreciation 5,322,000

31 Interest expense
Decommissioning liability

Decommissioning liability – January 1, 2020 3,220,000

Interest expense for 2020 386,400
Carrying amount – December 31, 2020 3,606,400
Interest expense for 2021 (12% x 3,606,400) 432,768

Exercise 4

Troy Company provided the following facts regarding pending litigation on December 31, 2021:

 The entity is defending against a first lawsuit and believes there is a 51% chance it will lose in court.
The entity estimates that damages will be P1,000,000.

 The entity is defending against a second lawsuit for which management believes it is virtually certain to
lose in court.

If it loses the lawsuit, management estimates damages will fall somewhere in the range of P3,000,000
to P5,000,000 with each amount in that range equally likely to occur.

 The entity is defending against a third lawsuit but the relevant loss will only occur far into the future.
The present values of the endpoints of the range are P1,500,000 and P2,500,000.

The management believes the effects of time value of money on these amounts are material but also
believes the timing of these amounts in uncertain.

 The entity is defending against a fourth lawsuit and believes there is only a 25% chance it will lose in
court.

If the entity loses, management believes damages will fall somewhere in the range of P3,000,000 to
P4,000,000 with each amount in that range equally likely to occur.

Required:
Indicate how the entity would disclose or account for the four lawsuits under IFRS in the financial
statements for the year ended December 31, 2021.

Solution to Exercise 4

First lawsuit 1,000,000

Second lawsuit (midpoint of range) 4,000,000
Third lawsuit (midpoint of range) 2,000,000
Fourth lawsuit (25% chance – possible) -

Total accrued litigation liability 7,000,000

C. Evaluation Exercises

General Instructions: You are required to provide solutions/answers to the following exercises. Supporting
computations which are presented in good form shall be part of all solutions. Answers/solutions to these
exercises are to be submitted to the Professor through her e-mail address or may be sent to her office/home,
whichever is convenient. Please take note of the deadline of submission which will be communicated to all
concerned students.

A. Theoretical Exercises

Choose the correct answer by writing the corresponding letter-answer and a convincing justification it is
indeed the correct answer. Briefly explain or provide justifiable reason/s via applicable appropriate
accounting principles discussed on provision: contingent liability.

1. Which is the correct definition of a provision?

a. A possible obligation arising from past events
b. A liability of uncertain timing or uncertain amount
c. A liability which cannot be easily measured
d. An obligation to transfer funds to an entity

2. A provision shall be recognized when

a. An entity has a present obligation as a result of a past event.
b. It is probable that an outflow of resources embodying economic benefits will be required to settle
the obligation.
c. The amount of the obligation can be measured reliably.
d. All of these are required for the recognition of a provision.

3. A legal obligation is an obligation that is derived from all of the following, except
a. Legislation c. Other operation of law
b. A contract d. An established pattern of practice

4. A constructive obligation is an obligation

I. That is derived from an entity’s action that the entity will accept certain responsibilities because of
past practice or published policy.
II. The entity has created a valid expectation in other parties that it will discharge those
responsibilities.
a. I only c. Both I and II
b. II only d. Either I or II

5. It is an event that creates a legal or constructive obligation because the entity has no other realistic
alternative but to settle the obligation.
a. Obligation event c. Subsequent event
b. Past event d. Current event

6. An entity has been served a legal notice at year-end by the Department of Environment and Natural
Resources to fit smoke detectors in its factory on or before middle of the next year. The cost fitting
smoke detector can be measured reliably.

How should the entity treat this in the financial statements at year-end?
a. Recognize a provision for the current year equal to the estimated amount.
b. Recognize a provision for the current year equal to one-half only of the estimated amount.
c. No provision is recognized at year-end because there is no present obligation for the future
expenditure since the entity can avoid the future expenditure by changing the method of operations,
but disclosure is required.
d. Ignore the event.

7. An entity operates chemical plants. The published policies include a commitment to making good any
damaged caused to the environment by its operations. The entity has always honored this commitment.

Which of the following scenarios relating to the entity would give rise to a provision?
a. On past experience it is likely that a chemical spill which would result in having to pay fines and
penalties will occur in the next year.
b. Recent research suggests there is a possibility that the entity’s actions may damage surrounding
wildlife.
c. The government has outlined plans for a new law requiring all environmental damage to be
rectified.
 d. A chemical spill from one of the entity’s plants has caused harm to the surrounding area and
wildlife.

8. An entity did not record an accrual for a present obligation but disclose the nature of the obligation and
the range of the loss. How likely is the loss?
a. Remote c. Probable
b. Reasonably possible d. Certain

9. The likelihood that the future event will or will not occur can be expressed by a range of outcome.
Which range means that the future event occurring is very slight?
a. Probable c. Certain
b. Reasonably possible d. Remote

10. How should a contingent liability be reported in the financial statements when it is reasonably
possible?
a. As a deferred liability c. As a disclosure only
b. As an accrued liability d. As an account payable

11. Disclosure usually is not required for

a. Contingent gain that is probable and measurable.
b. Contingent loss that is possible and measurable.
c. Contingent loss that is probable and cannot be reliably measured
d. Contingent loss that is remote and measurable

12. Reporting is the financial statements id required for

a. Loss contingency that is probable and measurable
b. Gain contingency that is probable and measurable
c. Loss contingency that is possible and measurable
d. All loss contingencies

13. A contingent liability

a. An estimated liability
b. An event which is not recognized because it is not probable that an outflow will be required or the
amount cannot be reliably estimated.
c. A potential large liability.
d. A potential small liability.

14. Which statement is incorrect concerning a contingent liability?

a. A contingent liability is not recognized.
b. A contingent liability is disclosed only.
c. No disclosure is required for remote contingent liability.
d. A contingent liability is both probable and measurable.

15. An entity received notification of legal action. How should the probable and measurable loss be
reported?
a. As a loss recorded in other comprehensive income
b. As a loss in the income statement and a contingent liability
c. As a loss in the income statement and a provision
d. In the notes to financial statements

B. Practical Exercises

Solve the following problems with supporting computations presented in good form:

1. Friday Company provided the following selected transactions related to contingencies. The fiscal year
ends on December 31, 2021 and financial statements are issued on March 31, 2022.

 Thursday is involved in a lawsuit resulting from a dispute with a customer over a 2021 transaction.
On December 31, 2021, attorneys advised that it was probable that Friday would lose P3,000,000
in an unfavorable outcome.

On February 15, 2022, judgment was rendered against Friday in the amount of P4,000,000 plus
internet P500,000. Friday does not plan to appeal the judgment.
  Since August 2021, Friday has been involved in labor dispute. Negotiations between the entity and
the union have not produced a settlement. Since January 2021, strikes have been ongoing at these
facilities.

It is virtually certain that material costs will be incurred but the amount of resultant costs cannot be
adequately predicted.

 Friday is the defendant in a lawsuit filed in January 2022 in which the plaintiff seeks P5,000,000 as
an adjustment to the purchase price related to the sale of Thursday’s hardwood division in 2021.

The lawsuit alleges that Thursday misrepresented the division’s assets and liabilities.

Legal counsel advised that it is reasonably possible that Thursday could lose P2,000,000 but that it
is extremely unlikely it could lose the P5,000,000 asked for.

 On March 1, 2022, the provincial government is in the process of investigating the possibility of
environmental violation by Thursday but has not proposed a penalty assessment.

Management feels as assessment is reasonably possible and if an assessment is made, a settlement

of up to P4,000,000 is probable.

Required:
Prepare journal entries that should be recorded as a result of the contingencies.

2. Saturday Company provided the following information on December 31, 2021:

 A personal injury liability suit for P500,000 was brought against Saturday Company in March
2021.

The management and legal counsel of Saturday Company conclude that it is not probable that
Saturday Company will be responsible for damages and that P150,000 is the best estimate of the
damages.

 In July 2021, Saturday Company became involved in a tax dispute with the BIR pertaining to 2020
income tax.

In December 2021, a judgment for P400,000 was assessed against Saturday Company by the tax
court.

Saturday Company is appealing the amount of the judgment.

The tax advisor and legal counsel of Saturday Company believed it is probable that the assessment
can be reduced on appeal by 50%.

 Saturday Company signed as guarantor for P200,000 loan by PNB to Sunday Company, a principal
supplier of Saturday.

By reason of financial difficulties, it is probable that Saturday Company shall pay the P200,000
loan with only a 60% recovery anticipated from Sunday Company.

Required: Prepare journal entries to recognize any provision on December 31, 2021.

3. August Company sells electrical goods covered by a one-year warranty for any defects.

Of the sales of P70,000,000 for the year, the entity estimated that 3% will have major defect, 5% will
have minor defect and 92% will have no defect. The cost of repairs would be P5,000,000 if all the
products sold had major defect and P3,000,000 if all had minor defect.

What amount should be recognized as warranty provision?

4. During 2021, September Company is the defendant in a breach of patent infringement lawsuit.

The entity’s lawyers believed that there is a 30% chance that the court will not dismiss the case and the
entity will incur outflow of economic benefits.
 However, if the court rules in favor of the claimant, the lawyers believe that there is a 20% chance that
the entity will be required to pay damages of P200,000 and an 80% chance that the entity will be
required to pay damages of P100,000. Other outcomes are unlikely.

The court is expected to rule in late December 2022. There is no indication that the claimant will settle
out of court.

A 7% risk adjustment factor to the probability-weighted expected cash flows is considered appropriate
to reflect the uncertainties in the cash flow estimates.

An appropriate discount rate is 5% per year. The PV of 1 at 5% for one period is 0.95.

1. Determine the amount that should be recognized as undiscounted cash flows for the provision.
2. Determine the amount that should be reported as provision for lawsuit on December 31, 2021?

5. October Company gives warranties at the time of sale to purchasers of its product. The entity
undertakers to make good, by repair or replacement, manufacturing defects that become apparent
within one year from the date of sale.

Sales of P5,000,000 were made evenly throughout 2021. The expenditures for warranty repairs and
replacements for the products sold in 2021 are expected to be made 50% in 2021 and 50% in 2022.

The 2022 outflows of economic benefits related to the warranty will take place on December 31, 2022.

The entity estimated that 75% of products sold require no warranty repairs, 15% of products sold
require minor repairs costing P100,000 and 10% of products sold require major repairs costing
P400,000.

An appropriate risk adjustment factor to reflect the uncertainties in the cash flow estimates is an
increment of 6% to the probability weighted expected cash flows.

The appropriate discount factor for cash flows expected to occur on December 31, 2022 is 0.94.

1. Determine the warranty expense for 2021.

2. Determine the amount that should be reported as warranty liability on December 31, 2021.

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