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- January 28, 2021 at 4:17 pm #608367
Good day,
Consumer Plus Ltd is a supermarket and is facing litigations regarding a defective
product sold to a customer. The company was told by its lawyers that is it likely to have
to pay $100,000 in damages to that customer. A provision was set up as at 31 December
2017. However, the following year, the lawyers found that the damages were more likely
to be $500,000.
i. Prepare the double-entry and extract from the financial statements to show how the
provision is to be treated and disclosed in the accounts as at:
1. 31 December 2017
2. 31 December 2018My query is, will the damages of the provisions be debited but the actual cost in 2018 be credited?
January 29, 2021 at 8:03 pm #608512Hi,
The initial amount recorded was the $100,000 when they would have DR SPL $100,000 CR Provision $100,000
When the amount is reassessed to be $500,000 we need to increase the provision by $400,000 (500,000 – 100,000) which requires the following entry DR SPL $400,000 CR Provision $400,000. This meant the provision is now held at $500,000 and there is an expense of $400,000 recognised through profit or loss.
Thanks
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