Garcinia Bhd is preparing its financial statements for the year ended 30 September 2014. The following matters are all outstanding at the year end. Garcinia Bhd’s sales director, who was dismissed on 15 September 2014, has lodged a claim for RM 150000 for unfair dismissal. Garcinia Bhd’s legal advisors believe that there is no case to answer and therefore think it is unlikely that this claim will succeed. Garcinia Bhd is facing litigation for damages from a customer for the supply of faulty goods on 1 September 2014. The claim which is for RM 750000 was received on 15 October 2014. Garcinia Bhd’s legal advisors consider that Garcinia Bhd is liable and that it is likely that this claim will succeed. On 25 October 2014, the company sent a counter-claim to its supplier for RM 600000. Garcinia Bhd’s legal advisors are unsure whether or not this claim will succeed. On 15 September 2014, Garcinia Bhd announced in the press that it is to close one of its divisions in January 2015. A detailed closure plan is in place and the costs of closure are reliably estimated at RM 450000 including RM 75000 for staff relocation. Although Garcinia Bhd has no legal obligation to do so, it has habitually operated a policy of allowing customers to return goods within 28 days, even where those goods are not fully faulty. Garcinia estimates that such returns usually amount to 1% of sales. Sales in September 2014 were RM 600000. By the end of September 2014, goods for RM 5250 had been returned. Required: For each of the following situation, discuss with reason whether the company has to make provision in accordance to MFRS 137: Provisions, contingent liabilities and contingent ass

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

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Garcinia Bhd is preparing its financial statements for the year ended 30 September 2014. The following matters are all outstanding at the year end.

Garcinia Bhd’s sales director, who was dismissed on 15 September 2014, has lodged a claim for RM 150000 for unfair dismissal. Garcinia Bhd’s legal advisors believe that there is no case to answer and therefore think it is unlikely that this claim will succeed.
Garcinia Bhd is facing litigation for damages from a customer for the supply of faulty goods on 1 September 2014. The claim which is for RM 750000 was received on 15 October 2014. Garcinia Bhd’s legal advisors consider that Garcinia Bhd is liable and that it is likely that this claim will succeed. On 25 October 2014, the company sent a counter-claim to its supplier for RM 600000. Garcinia Bhd’s legal advisors are unsure whether or not this claim will succeed.
On 15 September 2014, Garcinia Bhd announced in the press that it is to close one of its divisions in January 2015. A detailed closure plan is in place and the costs of closure are reliably estimated at RM 450000 including RM 75000 for staff relocation.
Although Garcinia Bhd has no legal obligation to do so, it has habitually operated a policy of allowing customers to return goods within 28 days, even where those goods are not fully faulty. Garcinia estimates that such returns usually amount to 1% of sales. Sales in September 2014 were RM 600000. By the end of September 2014, goods for RM 5250 had been returned.

Required:

For each of the following situation, discuss with reason whether the company has to make provision in accordance to MFRS 137: Provisions, contingent liabilities and contingent ass

Definition Definition Costs that a business is responsible for paying, should a particular event potentially occur in the future. Also called a potential liability, a contingent liability is generally recorded only when the amount of liability can be reasonably estimated and the contingency is likely to occur shortly. The Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Principles (IFRS) make it mandatory for the companies to record any contingent liability taking the principles of full disclosure, materiality, and prudence into consideration.

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