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Dear Sir, can You please help me with the following question from Becker Revision kit:
Brouha manufactures animal feed. The company accountant is preparing the 20X7 financial statements and considering the effect of a claim for damages of $50,000 received during the year. The company has offered the claimant $5,000 to settle the claim. The customer has declined the offer and made a claim to the court. The company’s legal advisors have noted that a similar claim was recently rejected in court.
How should the claim be reported in the 20X7 financial statements?
A No disclosure
B Disclosure as a contingent liability
C As a provision of $5,000
D As a provision of $50,000The book says the correct answer is – B. But I thought – A. Because in my opinion the word rejected means remote, doesn’t it?
Although a similar claim was rejected, the other claim may not have been exactly the same (and the fact that the company has made an offer to settle the claim suggests that they do accept that maybe they did do something wrong). Therefore there has to be a possibility that the court will accept this claim, and therefore they should disclose it by way of note (and all the details of the amounts etc. will be explained in the note).
One more question Sir,
Imagine the company’s accounting period is 01.01.2018-31.12.2018. Then at the year end the company makes a provision for income tax for that accounting period based on the accounting profit and applying the tax rate, and must include it in its SoFP. But how and when we separate that provided amount (income tax expense) between current tax liability and non-current deferred tax liability?
As far as Paper FA is concerned, it is all shown as a current liability. (The treatment of deferred tax is not relevant until later exams)
Sir, I could not find FR (financial reporting) Ask ACCA Tutor Forums, that is why I had to ask this question here in FA Tutor Forums. If it is possible, can you please explain me the above question abour income tax, please. Thank you very much.
The FR Ask the Tutor Forum is linked from here:
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