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ACCA Applied Knowledge · Financial Accounting · Events after the reporting period

Lumen Co has a 31 March 20X6 year end; statements were authorised on 10 June 20X6. At the year end it had a provision of $50,000 for a lawsuit brought by a customer. On 5 May 20X6 the court ordered Lumen to pay $72,000, and Lumen will not appeal. Which entry is required in the 20X6 financial statements?

Lumen should increase the provision by $22,000, debiting legal expense and crediting provision. The court ruling after the year end confirms an obligation existing at the reporting date, so the provision of $50,000 is adjusted to the settled $72,000. Posting the full $72,000 would double count.

  1. ADr Legal expense $22,000, Cr Provision $22,000Correct
  2. BDr Legal expense $72,000, Cr Provision $72,000
  3. CDr Provision $50,000, Cr Legal expense $50,000, with disclosure of the $72,000
  4. DNo entry, disclose the $22,000 as a contingent liability

Explanation

The court settlement confirms an obligation that existed at the reporting date, so it is adjusting. The provision is increased to the settled amount: 72,000 − 50,000 = 22,000 additional expense and liability. Posting the full $72,000 would double count the existing provision.

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