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ACCA Applied Knowledge · Financial Accounting · Provisions and contingencies

At 31 December 20X5 Ellison Co had a provision for legal claims of $45,000. At 31 December 20X6 the best estimate of the obligation is $30,000. Which entry should be made in the year ended 31 December 20X6?

Ellison should debit the provision and credit profit or loss with $15,000. IAS 37 requires provisions to be reviewed each reporting date and adjusted to the current best estimate, so the fall from $45,000 to $30,000 is released to profit or loss.

  1. ADebit provision $15,000, credit statement of profit or loss $15,000Correct
  2. BDebit statement of profit or loss $15,000, credit provision $15,000
  3. CDebit provision $30,000, credit statement of profit or loss $30,000
  4. DMake no entry because provisions are not adjusted once recognised

Explanation

Provisions are reviewed at each reporting date and adjusted to the current best estimate. The provision falls by $45,000 - $30,000 = $15,000, so debit provision and credit profit or loss (release). The reverse entry would increase the provision.

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