Pohutukawa Ltd’s financial statements are authorised for issue on 24 August 2021. Its balance date is 30 June 2021. Consider the following items of the company. An amount of $42,000 owing to Petal Ltd for services rendered during May 2021. Long service leave, estimated to be $350,000, owing to employees in respect of past services. Costs of $12,000 estimated to be incurred for relocating an employee from Pohutukawa Ltd’s head office location to another city. The staff member will physically relocate during July 2021. Provision of $40,000 for the overhaul of a machine. The overhaul is needed every 5 years and the machine was 5 years old as at 30 June 2021. On 30 March 2021 an employee sued Pohutukawa Ltd because she was seriously injured while working in the office. The injury occurred on 25 March 2021. The court hearing will happen during the next financial year. The company lawyer advised that it was likely that the judge would ask the company to compensate the employee for the injury; however, the amount of the compensation is very uncertain. Required Briefly explain whether each of the above would be a liability, a provision, a contingent liability, or none of the above, in the financial statements of Pohutukawa Ltd as at the end of its reporting period of 30 June 2021. Answer Item number Liability/Provision/Contingent liability/None Brief explanation i ii iii iv v

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Pohutukawa Ltd’s financial statements are authorised for issue on 24 August 2021. Its balance date is 30 June 2021. Consider the following items of the company.

An amount of $42,000 owing to Petal Ltd for services rendered during May 2021.
Long service leave, estimated to be $350,000, owing to employees in respect of past services.
Costs of $12,000 estimated to be incurred for relocating an employee from Pohutukawa Ltd’s head office location to another city. The staff member will physically relocate during July 2021.
Provision of $40,000 for the overhaul of a machine. The overhaul is needed every 5 years and the machine was 5 years old as at 30 June 2021.
On 30 March 2021 an employee sued Pohutukawa Ltd because she was seriously injured while working in the office. The injury occurred on 25 March 2021. The court hearing will happen during the next financial year. The company lawyer advised that it was likely that the judge would ask the company to compensate the employee for the injury; however, the amount of the compensation is very uncertain.

Required

Briefly explain whether each of the above would be a liability, a provision, a contingent liability, or none of the above, in the financial statements of Pohutukawa Ltd as at the end of its reporting period of 30 June 2021.

Answer
Item number	Liability/Provision/Contingent liability/None	Brief explanation
i
ii
iii
iv
v

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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