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Sebastian Co is currently involved in four legal cases, all of them
unrelated.
? In Case A, Sebastian Co is suing a supplier for $100,000.
? In Case B, Sebastian Co is suing a professional adviser for
$200,000.
? In Case C, Sebastian Co is being sued by a customer for
$300,000.
? In Case D, Sebastian Co is being sued by an investor for
$400,000.
Sebastian Co has been advised by its lawyers that the probabilities of
success in each case are as follows:
Case Likelihood of Sebastian Co winning the case
A 10%
B 90%
C 98%
D 60%
State the accounting treatment for each of the four cases.Ans
Case Comment Accounting
treatment
A
Contingent gain which is possible
Not recognised
B
Contingent gain which is possible
Disclose as a note
C
Contingent liability which is remote
(It is virtually certain that we will win)
Not recognised
D
Contingent liability which is possible
(It is probable that we will win)
Disclose as a noteGood day,Pls I don’t understand why C isn’t treated as a provision and showed in the financial statements.I’ll appreciate if you can explain better
I think that they’re saying that the likelihood of paying being 98% then the uncertainty is lost as it is pretty much certain and we recognise a liability as opposed to a provision.
When an event is certain i thought it was called a liability which is different from the term contigent liability.That is where my confusion is
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