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ACCA Applied Knowledge · Financial Accounting · Provisions and contingencies

Kestrel Co sells goods with a warranty. At the year end the legal position is uncertain, and lawyers say it is only possible, not probable, that a customer's $90,000 claim for a fault will succeed. Separately, Kestrel has a probable $50,000 obligation under another claim, estimated reliably. What total amount should Kestrel recognise as a provision, and how is the other claim treated?

Recognise a provision of $50,000 for the probable claim and disclose the $90,000 claim as a contingent liability. Only probable obligations with a reliable estimate are provided for; possible obligations are disclosed unless the chance of outflow is remote.

  1. A$140,000 provision with no disclosure
  2. B$50,000 provision and the $90,000 claim disclosed as a contingent liabilityCorrect
  3. C$50,000 provision and no disclosure of the $90,000 claim
  4. D$90,000 provision and the $50,000 claim disclosed

Explanation

The probable $50,000 obligation meets all recognition criteria and is provided for. The $90,000 claim is only possible, so it is a contingent liability, disclosed unless the likelihood of outflow is remote. Adding both amounts wrongly provides for a merely possible obligation.

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