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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?
Hi,
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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