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CA Intermediate · Advanced Accounting · Framework for Preparation and Presentation of Financial Statements

Kapoor Ltd. has a past event: a customer filed a claim for ₹6,00,000 for defective goods supplied. Lawyers believe it is probable that the company will lose, and the best estimate of outflow is ₹4,50,000. Under the Framework's definition of a liability and recognition criteria, how should the company treat it?

Kapoor Ltd. should recognise a liability of ₹4,50,000. There is a present obligation from a past event, an outflow is probable, and a reliable best estimate exists. The claimed ₹6,00,000 is not the measurement basis, and non-payment so far does not prevent recognition.

  1. ADisclose ₹6,00,000 as a contingent liability only
  2. BRecognise a liability of ₹4,50,000Correct
  3. CRecognise a liability of ₹6,00,000
  4. DIgnore it as no payment has been made

Explanation

A present obligation arising from a past event, with probable outflow and reliable estimate, meets the liability recognition criteria. The best estimate is ₹4,50,000, not the claimed amount. Contingent disclosure applies only when outflow is not probable.

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