FA Chapter 5 Questions IAS 37 – Provisions, Contingent Liabilities and Contingent Assets
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Question 4
Hi, I havent got a question but wanted to get clarification on Q4.
The Lawyer said that the possibility for an economic outflow is 60%. That then makes this probable so a provision will need to be created and the relevent exp account debited 100,000.
For the lawyer fee. This is an estimate based off what they said so that is an accrual created for 10,000. Dr legal fees exp & Cr accruals.
Can you confirm my understanding is correct? Thanks
Correct 🙂
100 percent great
Hi, in Q 3, Why did Sherley calculate provion as $3000 as a lawyer advised and June LTD did $ 100 000 as provision, but lawyer estimated as 60 % ($60 000). i think it is the same situation, right?
60% means that it is probably and therefore we make a provision
Question 2
For item 1, I’m still quite confused as to how and why 6% of sales can be a signal for us to make provisions. Is it related to its definition “…reliably estimated”?
If 6% of the sales give rise to a claim, then it is virtually certain that there will be warranty claims. So 6% is not the probability of there being claims, it is just the likely amount of the claims.
Why to provide for 110000 and not 60% of 100000 + 10000 ?
Because the payment is probable (i.e. the chances are more than 50%).
Did you watch the free lecture before attempting the test?
yes probable… so need a provision for 100000 and lawyer exp is certain . there is no correct ans . all ans are wrong
Here, 60% is the probability of having to pay the 100,000 in damages not 60% of 100,000.
The answer given is correct
Got 75% 🙂
Question 2:
Why is item 1 considered virtually certain?
Why is item 2 disclosed by note only and not treated as a provision?
1. It is virtually certain that there will be warranty claims. How much will be claimed is not sure (it will probably be around 6%) but there are virtually certain to be some claims whatever % it is.
2. It is only possible that they might have to pay. The might not have to pay anything.
but i believed virtually certain was used for asset not liabilities to be incurred,, that means they are probable
So? That means that we make a provision.
Got 75% .nice
got 75%
Thanks Mr. John Moffat.
I got 100%
🙂