Answered: Q. On 1 June 2020, a legal claim was…

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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Q. On 1 June 2020, a legal claim was made against HS Ltd for a faulty product. Lawyers have advised there is a 90% chance the claim will be successful and HS Ltd will have to pay a settlement amount of £75,000. There have been a number of complications with the court case, and it is not be likely to be fully settled until June 2022.
What entry should be made in relation to this claim for the year ended 31
March 2021?

a) No entry is required
b) HS Ltd should recognise a provision for £67,500
c) HS Ltd should recognise a provision for £75,000
d) HS Ltd should disclose this as a contingent liability

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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