A property developer constructs commercial housing units on a hilly area . It has complied with all the regulatory requirements for construction of real estates on hilly areas , including developing the necessary bunkers and contours to prevent soil erosion . On October 30 , 2015 , some of the support bunkers and contours collapsed after an unusual heavy rain . This caused extensive damages to houses at the foothill . The owners of those damaged houses have commenced legal proceedings against the company for the damages . However , the developer disputes the claim because it believes it has complied with the regulations and taken the necessary steps to prevent soil erosion . The lawyers of the developer are of the opinion that it is possible the developer may have to pay damages , based on settlement of similar court cases in the past . The lawyers estimate that the case may only be concluded in 2 years ’ time , considering any appeal to a higher court , if necessary . The estimate of the possible outcomes , excluding legal costs , with the associated probabilities are as follows : Possible outcome Estimated outflows Probability High P20,000,000 10 % Medium 10,000,000 50 % Low 5,000,000 40 % Legal fees and other costs to defend the case are estimated at P1,000,000 . The current one-year and two-year risk-free rates of interest are 4 % and 5 % respectively . The risk adjustment for errors in estimates of outflows is10 % as there are significant uncertainties in the estimates of possible outcomes and their related outflows . The developer is currently negotiating with the plaintiffs for an out-of-court settlement for P8,000,000 . The plaintiffs have not decided on this offer but their responses have been generally positive . The developer estimates that there is a 50 % the out of court settlement will materialize within a year . What amount of provision should the company recognize ?

a . None

c . P9,088,828

b . P8,862,070

d . P9,748,277

Answer rating: 100% (QA)

In the problem the provision has two cost origins The first one is the 1 estimate... View the full answer