Answered: ubble Candies is being sued by a…

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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Bubble Candies is being sued by a customer for $2 million for breach of contract over a cancelled order. Bubble Candies has obtained legal opinion that there is a 20% chance that Bubble Candies will lose the case. Accordingly Bubble Candies has provided $400,000 ($2 million × 20%) in respect of the claim. The unrecoverable legal costs of defending the action are estimated at $100,000. These have not been provided for as the case will not go to court until next year.

What is the amount of the provision that should be made by Bubble Candies in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets ?

Select one alternative

A. $2,000,000
B. $2,100,000
C. $500,000
D. $100,000

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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